i believe three guards are very important if the government has to have difficult choices, which the government has to do. the first of those is that the government appoint competition to the maximum possible extent so everybody has a fair shot of contributing and being involved. secondly whatever is done is transparent. the third thing that i think needs to be done is to have -- assure that we have competent people in our government who are able to make sensible judgments without conflicts and given those three criteria, i believe that the government not only can, but it has to make choices. pick winners or losers. you cited arpa-e. i would add incatel, i have a conflict here, but there's a certain parallel, incatel give

ain't number of tools in the tool kit by the congress that go all the way from taking equity positions to giving grants and contracts, to giving advice and it my view it's been successful in carrying out its mission. it would be another example. they make choices every day. >> thank you very much. north murkowski? >> mr. chairman, mr. augustine, in the report you have concluded that we can have the greatest impact if we focus on energy, r&d, others have said that the focus or the major impact should be on the deployment end. as we are trying to figure out how we allocate scarcer dollars and how we prioritize, what -- what part of the technology

chain do you figure the -- we here in the government should be focusing on most? >> that's a difficult question. certainly if you don't focus on research, there will be nothing to deploy. on the other hand if you focus entirely on research there be no money to deploy the benefits so you need to do both. research costs a lot less in general than the development, deployment or proof of principle, proof of scaling step. and so it may than much more money's required for the latter, even though ideally i think the role of the government is more easily justified, focused on research. it used to be that the u.s. government, when i say used to, i mean two, three decades ago, the u.s. government provided two-thirds of the research and development spent in this country. today it spends about a third. the problem is that industry,

which has picked up to to-thirds spends entirely on "d" and is getting out of the "r" business. bill lavs is the classic exam of what's happening in industry. i have my own experiences of what's happening in that regard. we immediate to do both. where do you focus? on the two valleys of death, how do you take just basic research ideas that get funded which national science foundation, places like that, and how do you turn those into engineering projects and then, secondly, how do you get across that valley? the second valley which is scaleability and in all cases i believe industry, the beneficiaries, should involve some of their own investment, they should have some skin in the game. >> it's trying to find that balance and determining where

you have those areas where the private sector just isn't willing or able to be involved. and how we define all of that is, of course, far more difficult than it might sound. let me ask how we pay for this. in my opening statement i mentioned one of the things that i think makes sense is to take the revenues from -- take certain revenues from greater domestic energy production to help pay for our innovation. your report outlines that as one of the options. i appreciate that. some of the or possibilities would include raising energy prices, but that's kind of tough for us all right now. i think we look at that. but i -- i'm reading your language. it says that the aeic does not advocate one revenue option over another. so that's probably your out

there. as one of the individuals on the committee here, do you -- do you think there is within approach that is perhaps better than some of the others that you have outlined there for us? >> i suspect, once again, a mix of approaches is appropriate, though i have some that are personally better than others. and the reason we didn't try to make a choice that is we simply didn't get into enough detail to take a strong position. today, as you well know, we will send a billion dollars overseas today to foreign countries to pay for net cost of the oil we buy. for the last two years, we've been averaging in the order of $2 billion a year on energy r&d a year. and that suggests to me that there's great opportunity to find the kind of money we need to triple the r&d, which is what our little group has

recommended. the various sources of that certainly i think back in my own case probably 25 years ago or more, i was proposing that we add three, four sets to the cost of a gallon of gasoline back when gasoline cost 50 cents a gallon. i can recall when it cost 19 cents a gallon. and i said, let's add two or three cents, put that money research and development and my economist friends told me i would destroy the economy if we did that. today we pay $4.50 a gallon and the money goes to other nations, a few who would like to kill us with the money we send to them. there's clearly something wrong with that model. i would hope that we would in fact, provide a tax if you will, on some of the energy sources, particularly those that are pollute ant, high polluting sources. much along the lines you

suggested. i personally don't have a problem with the modest tax at the gas pump. but i realize it's a very difficult issue today. but the idea of having the industry that most benefits in the long term pay part of the cost, it seems appropriate to me, particularly when you have an industry that's been spending maybe a half a percent of its sales, revenues, on r&d, the industry i came from spent 10%, pharmaceutical industry spends 20%, electronics industry i think around 13, it just seems not unreasonable to me that given the importance of r&d and the modest pain added by some of these taxes, and i'm not a tax guy, but this case i think it's

worth the price. >> well, i appreciate your comments. i've long held that one of the ways to get to our energy future is, again, using those revenues from our fossil fuels to help build out the technology, the innovation, to advance us to the next generation of energy. but appreciate your comments. >> thank you. >> senator udall. >> thank you mr. chairman, thank you the ranking member for holding a very important hear on innovation. always good to see you, mr. augustine. thank you for your continued service to the country. your ideas are always spot on. the american energy innovation council has done yeoman's work here and i hope we will listen to, and implement, your recommendations. as you've pointed out, we are in the midst of a clean energy revolution and by that i think we mean all energy sources and all energy technologies have

clean elements. we can't have, as you point out, inconsistent and uncertain innovation policies. that's why it's -- you've underscored here and why this hearing, again, is so important. i have in my notes here -- i've said to myself -- we need to be leaders in this field and we've always been a paragone of innovation. i think about the fact we have been leaders, particularly -- well, in every energy technology, but i think about solar and wind, for example, in the '70s. now we're trying to play catch up with some countries that have seen the possibility here. you know colorado. i'm biased, honored to represent the state of colorado. we are a national leader in many areas and we have a great model of how industry, entrepreneurs, universities, research institutions like the national renewable government lab and the government encouraging energy innovation which spurs job

creation and economic growth, and then i would venture to say that that therefore means coloradans and americans have a more secure energy and economic future. so thank you for pointing out all of the possibilities to us. let me move to arpa-e. you talk about it as a model program, one we should prioritize and grow it going forward. you recommend other part of the d.o.e. could use the arpa-e mod. would you speak how this model could be applied, more specific, more broad ways not just the d.e. but other activity. >> i'd be glad do that. let me describe what is essential facets of arpa-e one of which is that arpa-e -- excuse me, arpa model. >> yes. >> arpa always willing to take

risks and realized that some cases they would fail. arpa did not devote itself to trying to do something we now do 20% better. they devoted themselves to try to do it three times better. and when they succeeded, it was really an impactful event. so they were willing to take risks. they set high goals. they made -- very divisive in deciding what they would support. and when they could see that something wasn't achieving what they expected they stopped it, put the money elsewhere. very important to arpa, i believe, is that they attracted extremely high quality talent. one of the ways they did that was by delegating a lot of the authority to the program managers who oversaw these projects. another thing they did was they expected people to only stay their four, five years. they had a lot of rotation of

people. and clearly the best way to freshen the organization is to rotate people through it. about and the best way to transfer knowledge to other organizations is by rotating people out of it into the other organizations. but then finally, i would have to cite that the case of arpa, the government has been -- i don't like the word generous, but i think very constructive in supporting arpa financially so that it has the resources it needs to pursue good ideas. so those are the sorts of things. also arpa's very problem-solving oriented. they're not organized by discipline, as is d.o.e. or universities. they set out to solve a problem. >> in effect, you're saying you have to risk failure, you need to provide a lot of space in a decentralized environment and turn people loose with a goal of not increasing the value of the

product or service 20% but 3x and that's helpful to hear all of that. which isn't necessarily the way things are done in the government or private sector but under your tutelage you put teams together to do what arpa-e or what d ra pa today does. in the remaining time i have, let's me talk about how we help american households transition to renewable energy systems. the capital investments can be cost prohibitive. we secretive ways in which residential renewal energy systems are leased. senators have introduced a bill, the acronym, the real act. i've enjoyed them in co-sponsoring that legislation. it creates a secondary market by having the government ensure the lessee's value. the ceo scored this at no cost, which is always great in this

town today. can you speak to that model? other areas in which you might have identified where we can help those who want to make the right investment but was find the cost of the capital prohibitive or difficult to embrace initially? >> yes. i think the sort of thing you described really addresses the other side of trying to encourage clean energy implementation. one side is to encourage the research and development and so on. the other side is the poolside, help the consume ar ford it. that can be done by subsidizing and i don't like the word subsidizing but i'll use it. costs of certain forms of energy, helping people defray the cost of new buildings that are very energy efficient and then they could pay that back with the savings that they gain

from being more energy efficient. and i think in the grand scheme of things today we have a remarkable opportunity that bringing together the idea of horizontal drilling and hydraul hydraul hydraulic fracturing to recover shale gas could buy us the time to pursue some of these really promising clean energy opportunities, otherwise we just didn't have time to pursue, given our dependency on oil and lack of much we could do about it. and as you point out, it wasn't many years ago that we were number one in central thermal systems, wind power. today we've lost our lead. i was recently in japan, i was struck by how much we've lost our lead. >> thank you again for your leadership.

great to see you. >> thank you. nice to see you, sir. >> senator frank? >> thank you mr. chairman. and thank you, mr. augustine. we seem to have a debate here in the senate over the very nature of the role of government in development of new technologies and, again, i'm -- i appreciate the ranking member being here, but again i don't see any of my colleagues from the other side. i don't -- we have these hearings a lot and we have either they don't show up at all or they come in and make a statement and leave and sometimes don't even want answers to their statement. i mean, your report points to government support for development of all kinds of technologies that have led to all kinds of jobs. we talk about jobs.

civilian nuclear reactors wouldn't have happened without the government. gps technology wouldn't have happened without the government. civilian aircrafts, aircraft, the way they've developed, that's your industry, without the government. the internet, for goodness sakes, darpa created the internet. you know the long list of government support for all of these industries just shows how -- what the track record has been. and i don't see any reason why the track record wouldn't continue to be -- is there anything about clean energy and renewable energy that was different, by its nature different than all of these

others that i've cited? >> well, i think, senator, the things you cite have in common the fact that they were high risk undertakings offering high pay-off and that's not an area that's particularly attractive to the private investor. and i think energy fits this very well. energy happens to have an additional characteristics that it comes in very costly quanta, if you will, to go to nuclear power you never get there with the private sector. >> many steps. >> right. if you talk about nuclear fusion, that's a 60-year project and i happen to think a very important one. >> i notice that you mentions fusion and it's something i've been interested in. and they always say that, you know, nuclear fusion is the energy of the future and always will be, but i think that has a

tremendous promise and we still continue to invest in that and they're doing -- you know, and there's been, you know, support for industry for the development of shale fracking and directle drilling, that's been done by the government support for industry. as well as 20 years of tax credits for production and subsidies. if we pay for some of this stuff, why not pay for it with some of the subsidies ta we're already paying to this mature industry? so, you know, it was -- it was government support that got shale gas to go from inaccessible to dominating much of our energy sector. so i -- i don't understand the unwillingness of my colleagues

on the other side to even be present to -- and to recognize what role the government has played. i wanted -- you mentioned energy efficiency and efficiency, and about retrofitting. you touched on it a little bit. and i was just -- and that means things like smart meters to better gauge energy use or efficient microprocessors to make batteries last longer, innovation, and batteries are something that we've been doing in this latest round of government-funded research. one thing we did in minnesota that has helped create jobs in retrofitting, and i'll get to it, this will be a question, actually, is we have an energy

efficiency standard that our utilities have to meet, and every year, their customers have to improve their efficiency by 1.25%, 1.5%. you think that's an area where if we did that nationally, because it works in minnesota, and when you do that in minnesota, the utility companies go like you know what, i think i'll invest in this retrofit of my customer, win the money up front and it will pay for itself, the energy savings pays for itself. if we did a national renewable energy standard -- not renewable energy standard, but efficiency standard for these utilities, do you think that would have a good effect on our use of energy? >> i do believe that energy efficiency is an important part of the solution to this problem.

i think there's not one thing that's going to solve it, but if we could encourage the public either through the use of controllers and their power, the time of day they use energy or just using less energy, that has to be a clear positive, and to encourage the public to do that i think is an important thing to do. my bottom line, senator, is that i spent ten years in the government, i've traveled to 111 countries and having seen all that, i'm a great believer in the private sector doing whatever it can. there's one area where i think there's an exception to that, and that is when the market itself fails, and the energy market has failed, and without government support of the type you describe and other types that have been described, we will not solve the energy

problem in this country. >> thank you, sir. you've been a successful businessman, haven't you? >> well, i don't know. i've been a businessman. >> okay. well, i think you've been successful but that's on my, you know, my bar. >> senator murkowski, do you have additional questions? >> i do, mr. chairman, but i also know we've got a second panel coming up. but i have to have you fill in the blanks. why do you think the energy sector has failed above all the other sectors that are out there? what is it about energy that has made it more complicated? >> i think a number of things. one is the high capital cost, the long time that facilities remained in existence, 40, 50 years. i think more importantly, it's been a highly regulated industry. the oil industry is controlled

by cartels abroad. the free enterprise system was generally not found its way into the energy market to date and one of the things that you all could do is to help bring the free enterprise system into the market. >> thank you, mr. chairman. >> mr. augustine, thank you very much for your testimony and the good work that's gone into these reports. we appreciate it very much. >> thank you. it's always a privilege to appear before this committee. >> why don't we go to our second panel. we have two witnesses on our second panel. mr. ethan zindler, who is head of policy analysis with bloomberg new energy finance. he has testified to us before. mr. jesse jenkins is also here. he's the director of energy and climate policy with the breakthrough institute in oakland, california, and we're told today is your birthday as well, mr. jenkins. congratulations. this is a big day for birthdays.

>> we've got cupcakes in the back, mr. jenkins. >> yeah, that's right. why don't we have the same procedure here that we did with mr. augustine and have each of you give us five or six minutes of summarizing what you think we should know from your testimony. we will include your full testimony in the record, then we'll have some questions. mr. zindler, you want to be first? >> sure. thank you. good morning, chairman bingaman, senators, ladies and gentlemen. of course, happy birthday to my co-panelist, senator murkowski. it's an honor and privilege to be here before the committee again. i join you in my role as analyst with bloomberg new energy finance, a division of bloomberg, focused on the clean energy sector. our group provides accurate and actionable data and insight on investment technology and policy trends in clean energy. my remarks today represent my views alone and not the corporate positions of either

bloomberg lp or bloomberg new energy finance. in addition, they do not represent specific investment advice and should not be construed as such. that's what the lawyers told me to tell you. in june 2010, my firm produced a study in partnership with the nonprofit clean energy group entitled "crossing the valley of death, solutions to the next generation of clean energy -- to the next generation clean energy project financing gap." that report examined the various challenges facing energy technology companies looking to scale up while driving their costs down. it encompassed interviews with more than five dozen technologists, entrepreneurs and investors in the clean energy space. other studies have since explored this area in greater depth and advanced discussion in important ways. the most notable has been the american energy innovation council's work which examines the same valley of death conundrum but with an explicit focus on american competitiveness. my fellow witness, jesse jenkins

of the breakthrough institute and others have also provided important insights in this area. the clean energy sector has seen significant growth in recent years. new investment into the industry which totaled $54 billion in 2004 and $189 billion in 2009 rose to $263 billion last year. in fact, in the fourth quarter of 2011, our firm counted the one trillionth new dollar invested in this sector. meanwhile, we have seen clean energy technologies make important progress down their respective learning curves. the price of a solar module has dropped by more than half in just the last 16 months. the efficiency of wind turbines continues to improve and prices for lithium ion batteries used in electric vehicles are starting to tick down. a substantial part of this progress is a result of innovation but much of it is due simply to economies of scale. as production of this equipment has ramped up, per unit costs have come down.

inevitably all this raises a question of whether or not the capital markets are today providing sufficient financing to address the valley of death conundrum. i would argue that they do not and a closer examination of the investment trends reveals why. the vast majority of new capital entering the clean energy sector in any given year is actually directed towards well-established, low risk technologies. just $5.1 billion of the $263 billion that we tracked last year came in the form of venture capital for new companies with the newest technologies. within their portfolios, they are now spending less money on the early stage companies in making fewer a-round investments in new companies. so in short, the so-called valley of death at the technology stage for the earliest technology development has certainly not been bridged so far. similarly, the riddle of later stage commercialization valley of death also remains unsolved. for a time, it appeared the

solution might come from the public stock exchanges, where new biofuels, solar and electric vehicle companies raised billions via initial public offerings to support their growth, but public market fund raising has all but evaporated in recent quarters for clean energy. today, for instance, there are half a dozen next generation biofuels firms looking to ipo. it remains to be seen if any of them will be able to float their shares and as a side, i would note last week, facebook managed to be valued at $100 billion and linkedin is currently valued at $10 billion so there does seem to be an appetite for dot-com startups or company. the risk appetite for clean energy companies is different at this particular moment. finally, i would like to take just a moment to address the question of where the u.s. stands in comparison to its peers in terms of clean energy technology, development and deployment. i would emphasize that these two issues, development and deployment, should