separately. in terms of deployment, there can be little debate that the u.s. today trails nations such as germany and italy in terms of the installation of new clean power generation. the same goes for the manufacturing of that conventional equipment with the u.s. often lagging behind china and others. on the question of new technology development, there remains much to play for, however. the clean energy marketplace cannot be sustained primarily by subsidies forever. already, we are seeing signs of declining support from governments around the world. rather, the industry must and we think will compete and beat its fossil rivals on price without government support. for some technologies in some parts of the world this is already occurring, but the day when that happens far and wide still lies ahead. when it arrives, will the u.s. be home to the most critical new energy technologies and the associated manufacturing capacity? will the u.s. be a market maker for these technologies? or a price taker, buying equipment from companies overseas.

this remains very much to be seen, but there are hopeful signs for the u.s. despite the lack of investment. the country is home to world class research institutions and laboratories, it is the hub for venture investing. in short, in my view, no nation may be better positioned to own the long term energy technology future than the united states. the only question is whether these resources can be coordinated to maximum advantage and that is where public policy inevitably must enter the picture. thank you very much for your time. i look forward to your questions. >> thank you very much. mr. jenkins? >> thank you, chairman bingaman, ranking member murkowski and distinguished members of the committee. i direct the energy and climate program at the breakthrough institute, an independent public policy think tank based in oakland, california. it's an honor to appear before you today to discuss the role of government and energy innovation, particularly on my birthday and senator murkowski's. advanced energy policy and markets in the united states are now at a key inflection point.

in recent years, u.s. advanced energy sectors have grown rapidly, adding jobs even through the depth of the recession, while reducing costs for many technologies, including solar and wind power, batteries for electric vehicles and advanced biofuels. still, a recent cost declines mark important industry maturation and progress, nearly all advanced energy sectors currently rely on public policy support to gain an expanding foothold in today's well-established energy markets. that policy support is now poised to turn from boom to bust. total annual federal spending supporting advanced energy industries surged to $44.3 billion in 2009, but it is now poised to decline 75% to $11 billion by 2014. that's according to original analysis of 92 federal policies supporting advanced energy sectors conducted by the breakthrough institute and recently published with scholars at the brookings institution and world resources institute as beyond boom and bust, putting clean tech on a path to subsidy independence.

of the 92 programs we examined, a full 70% are now scheduled to expire by 2014. the topic of this hearing is thus very timely. with the u.s. advanced energy policy systems set to be effectively wiped clean in the coming years, my beyond boom and bust co-authors and i recommend smart energy policy reform along two key fronts. first, energy deployment subsidies and policies should be reformed to better drive and reward innovation and move advanced energy sectors towards subsidy independence as soon as possible. second, we should strengthen our federal energy r & d and commercialization ints stugtss and investments. our recommendations find much agreement with the recommendations of the american energy innovation council and with some of bloomberg new energy finance's thinking on policies to help private entrepreneurs and firms cross the so-called clean energy valleys of death. i'm happy to discuss those topics in greater detail in the q & a to follow but i want to focus here on subsidy reform. first, when discussing the role

of government in energy innovation it is important to note that energy is a commodity like a bar of steel or a lump of copper. we don't care much about the qualities of the kilowatt hour of electricity or the gallon of fuel itself. what we care about are the products and services we derive from those fuels. while new pharmaceuticals or electronics command a price premium from customers by offering new vallue added features, new technologies must routinely compete on price alone right from the get-go. this is an extremely challenging task especially when facing competition from fossil fuels that enjoyed over a century to mature and develop. it helps explain why the government must play a more proactive and extended role in driving energy innovation in other sectors. in light of this, the government's role is critical on at least two fronts. first, policy is key to jump-start market demand for nascent energy technologies that currently cost more than well entrenched conventional fuels and would thus otherwise not attract private sector

investment. second, equally important, government policies must strive -- must drive steady innovation, cost declines and technology improvements that can advance these maturing sectors towards full cost competitiveness with mature fossil fuels. with federal funds now poised to contract, my colleagues and i believe that now is the time to reform energy subsidies to ensure that they efficiently accomplish both of these key objectives, driving market demand and continual innovation. we should not abandon today's still maturing advanced energy sectors. but neither can we afford to perpetually subsidize these industries without making steady progress on price and performance. we outline a set of criteria for energy subsidy reform to ensure these policies reward companies for developing, producing and continually improving advanced energy technologies. in brief, optimized deployment policies should establish competitive markets among technologies at similar stages of maturity. they should avoid locking out

new technologies to promote a diverse energy portfolio. they should provide sufficient business certainty and they should maximize the impact of taxpayer dollars by efficiently unlocking private investment. above all, market creating deployment policies should provide only targeted and temporary support for technologies that are still maturing and improving. they should be explicitly designed to drive and reward continual cost reductions and performance improvements and they should steadily reduce subsidy levels and public support as these technologies improve. eventually these subsidies should fade away entirely as advanced energy sectors become fully competitive with conventional fuels. the role of government in driving markets and innovation for advanced energy technologies should thus be limited and direct. the goal should be to help develop robust industries that can stand on their own and thrive without public subsidies as soon as possible. several policy mechanisms may be designed to meet these criteria and i look forward to discussing those in more detail in the questions to follow. i thank you for considering

these recommendations. thank you. >> thank you very much. i believe senator murkowski wanted to make a statement. >> if i may, mr. chairman, i've got to excuse myself and attend an appropriations markup. otherwise, i would not be leaving. i would be sitting and asking a series of questions. i'm intrigued by some of your proposals, mr. jenkins, about how we really do get to reform of some of our subsidies and how we figure out what the ramping is. i think it is a key part to what we need to consider. i do have a whole series of questions that i would like to submit to both of you for the record and perhaps we would have an opportunity to visit outside of the committee hearing to follow up on some of the proposals. this is an important topic. i think we all recognize that energy, the energy sector is one where things are constantly evolving and how we appropriately integrate the

federal government into the incentive process is an important one. so thank you, mr. chairman. appreciate it. >> thank you very much. let me go ahead with a couple of questions. first, let me ask mr. zindler, one of the policies that some governments have pursued is to establish so-called clean energy banks to help with deployment of clean energy. i believe united kingdom and australia in particular have moved ahead with this. could you describe what this phenomena is and what you think the benefits might be if we were to consider that, or if you don't think it makes sense here, say that as well. go right ahead.

>> well, as a quick update, so, you know, as obviously you're well aware here in the u.s., under your leadership and others, there's been some attempt to establish a clean energy deployment administration, and i think as you know, i think it's important to mention, this same idea is being pursued by other countries around the world right now, australia is close to finalizing a $10 billion green investment bank. the uk is committing potentially three billion pounds. india has made some announcements although i don't think that plan has moved forward too far. the basic idea of all these institutions, more or less, is to create a separate sort of quasi-public entity that gets seed funding from government and then essentially can operate relatively autonomously in making investment in new technologies and then as those technologies develop and

hopefully are winners, they get a return on that investment, that they can reinvest and continue on. the idea is that it becomes -- it does start with some -- a nut of government money to begin with, but then it becomes self-sustaining over time. i think one of the interesting potential advantages of this model is that by kind of breaking it out of government infrastructure, you can give it more leeway to make faster decisions and to operate in a more flexible manner and to make different kinds of bets, financial bets, than you might get through very highly regulated government program. so that's the idea generally speaking, and it's certainly intriguing. what it really -- i think what's potentially most interesting about it is its ability to address the so-called demonstration valley of death. that's the $100 million to $200 million that might be needed to build a next generation biofuels plant or a plant that uses solar

technology. that kind of capital, banks generally won't lend because they have the money but they don't want to take that much risk. venture capitalists like that much, willing to take that much risk but don't have that much money usually to make on a single bet so it kind of falls into a black hole of sorts, and an institution like that that's willing to provide large amounts of capital at a higher risk rate really offers real potential. >> thanks. let me ask mr. jenkins a question. you list in your testimony here several policies that could be structured to accomplish some of the objectives you identify and one of the policies you mention there is reverse auction incentives. you say that those could be established for varying technologies to drive industry competition and innovation. i was wondering if you could elaborate on that a little bit and tell us how you think that

might work and whether there are examples of that that we ought to look at. >> thank you, senator. senator franken earlier mentioned the role of government in a number of key technologies that have developed in the past and one of those is microchips where the government played an early demanding role or role as an early demanding customer for virtually all of the market for microchips in the 1960s and '70s for the space program, the minute man missile program. that had the job of effectively driving down the cost of those technologies to the point where they could be more widely adopted by the private sector. i think reverse auctions have the potential to play a similar kind of role as government procurement. in southern california, utilities are using reverse auction programs to procure solar panels at record low prices and to use the reverse auction mechanism to create a competitive market opportunity for firms to bid costs for their projects to meet a certain set of demand, number of megawatt hours or megawatts that utilities there need to procure from solar projects.

the winning bids then have strong penalties for noncompliance such as a critical aspect of reverse auctions to ensure that people are providing accurate bids that they can actually meet, and in the process, the southern california utilities are procuring several hundred megawatts of solar at close or under $90 per megawatt hour which are significantly lower than prices we've seen even in the last quarter. so it's a model that's been used in other markets in india, in china, in brazil, to varying degrees of success depending on how well they're able to police against nonperformance of contracts. but i think it's a model that meets many of the criteria that we outlined. it creates competitive markets, steadily drives down price because of constantly driving competition and firms have an incentive to reduce cost, to expand in their market share and so it's one of the policies we think we should look very closely at. i should also note that some of the colleagues on the republican side of the aisle have proposed similar reverse auction mechanisms in the past for

biofuels, for deployment of wind or solar. it seems like an idea that has been bouncing around the halls here as well and we should take a look at for continual cost reductions for these technologies. >> thank you very much. senator franken? >> thank you, mr. chairman. i just want to ask you, mr. jenkins, i spoke a little earlier about the government support for industry, for the oil industry and gas industry, and support for the industry in the development of shale fracturing and directional drilling. can you talk a little bit about that? >> thank you, senator. this is the result of an independent investigation, breakthrough institute conducted interviewing historians, industry folks from the oil and

gas sector as well as government researchers to really piece together what was the process of development of the key technologies that enabled the shale gas revolution that is now sweeping across domestic energy markets in the united states. what we found is that as with a number of other technologies, the role of government in supporting innovation in the private sector was critical to the development of a number of the technologies that were needed to unlock previously unrecoverable shale resources. so to summarize, that includes the eastern gas shales project, a series of public/private shale drilling demonstration projects that were undertaken in the 1970s, by the energy research and development agency, and the bureau of mines. the collaboration with the gas research institute which is an interesting model of industry research consortium that received partial funding and r & d oversight from the federal energy regulatory committee and to the discussion earlier of senator murkowski's questions about funding, it was funded by a user surtax on gas

transmission fees so we set aside a little bit of that funds in the way that mr. augustine mentioned to drive further innovation in that sector. i think it's an intriguing model here. early shale fracturing and directional drilling technologies were also developed and later the department of energy, the bureau of mines and the morgantown energy research center in west virginia, now the national energy technology lab, to senator bingaman's home state, the national laboratories played a key role in developing imaging technology originally to detect fractures and collapses in coal mines. that was later applied to understanding the geology of shale deposits and where the fractures would occur so private industry could figure out where to locate their drill bores and fractures. so -- and beyond the initial demonstration of these technologies, there was also a period of time when shale was technically recoverable but prohibitively expensive compared to more conventional extraction

technologies. once again, this is the second key role the government has to play. the government instituted the section 29 production tax credit for unconventional gases from shale, sands and coal bed methane. it made it profitable for the private sector to continue to develop and innovate -- >> what helped develop the market? >> without the conventional tax credit there would have been no profitable return for private sector innovators to -- >> that was the second valley of depth. so really, the government brought an industry, created the technology that made it possible which is in one way the first valley of death, then created the market and subsidized it for the second valley of death. so that when my colleagues on the other side who aren't here, when they sing the praises of fracturing and then demonize

government involvement in picking winners and losers, it seems like they are -- they don't know the history of this industry. would that be a fair statement? >> that may be the case. i do believe the history has a clear record here that the government has played a substantial role in partnering with the private sector. we shouldn't diminish the private sector's role in driving innovation in these sectors but the risks, the capital requirements, the time horizons required to drive these new technologies forward are really prohibitive. this is where the private sector does fail. you needed the right kind of partnership between the smart government policies, limited and targeted way to address those barriers and that will unlock the private sector to do what it does best. >> i'll take that as a question. mr. zindler, i think this is what the chairman was asking about. i think you spoke to it but i just want to specifically talk

about the clean energy development administration or ceda. do you think that is a useful model as a way of helping get ov over the second valley of death? >> potentially it certainly has that as that opportunity. there is a short circuit in the market, as i tried to articulate, that basically there is not the right kind of money out there for this kind of task for large scale demonstration projects so whether it's ceda or maybe some other model or maybe you change the tax rules or whatever it is, that is a market disconnect that is sort of screaming out for some kind of solution. and i think there are a number of interesting ideas out there. that's certainly one of them. >> thank you. thank you, mr. chairman. >> did you have any additional questions? if not, we can conclude the hearing at this point.

>> well, i don't want to, you know, put a crimp in your day. >> no, go right ahead. that's what my day's for. >> i wanted to ask about china and sometimes we help, the u.s. government helps u.s. companies come up with technologies and then when these companies go to do something in china, china insists on their, you know, their intellectual property being -- giving up their trade secrets in order to do business in china, and i think this violates basic free trade principles. senator webb has looked at this issue and i believe this

committee ought to explore a solution to this problem. do either of you have any opinions on how funding agencies can better protect taxpayer funded technologies? >> i'll take a crack at that. that's a tough question, obviously. this sector, the u.s./china clean energy trade relationship is at a very interesting juncture. in fact, as you may have seen last week, the department of commerce announced new fairly substantial tariffs on chinese goods, solar equipment imported into the united states, so there is some tension there and i'll tread carefully in my remarks on this. i think that to some degree, the chinese government made some of the most important decisions about clean energy three or four years ago when it did make it difficult for outside companies

to compete for contracts there. and now essentially, and in the meantime, we saw a real scale-up of domestic wind turbine manufacturing in china and really in particular for solar over that time. and they have become really world leaders. so on the one hand, as you think about the politics of this, i understand the concerns about creating jobs and protecting intellectual property. on the other, i do think it's important to note that in part because of that scale-up, the cost of solar, for instance, has never been cheaper than it's been and -- >> that actually undercut solyndra. that was part of the solyndra story, right? >> it was certainly part of the issue for solyndra is that solyndra -- solyndra is a very interesting example of a company that was trying to look longer range about driving down costs and literally got caught up to some large degree by what was going on at that very moment, so the conventional sector for

solar has simply scaled faster and prices have come down faster -- >> so in an odd way they were undercut, solyndra was actually undercut by the fact that the chinese spent so much in promoting their own solar industry to make it so much cheaper that they were undercut and that their long term viability became longer term. because they had a higher quality but more expensive product, right? >> what they were doing was looking further down the road and basically the future arrived faster than i think they had anticipated. that happened for a number of reasons. it wasn't just the chinese that had scaled up. we've seen capacity come online in taiwan and other places as well. but the solar market has very rapidly expanded and frankly gotten a little ahead of itself in the last couple years and that's driven down prices very sharply. >> right. mr. jenkins, did you -- >> yeah. just one thing to add, i think

the current markets today for advanced energy technologies are substantial but they are almost entirely government created markets. they're created by subsidies in europe and china and the united states or elsewhere. i think we have to keep our eye on the ultimate prize which are just the development of cost competitive advanced energy technologies that can scale a $5 trillion global energy market without subsidies. so the game i think in the long term is who can develop the technologies that are cost competitive enough to export to global markets at 90% plus of energy demand growth is coming from outside of the oecd countries in the emerging economies and those countries are going to be unable or unwilling to substantially subsidize the deployment of cleaner energy technologies. one thing we can focus on both to drive competition, to enhance u.s. competition and to reduce the cost of taxpayer investments now is that the investments we level in creating these markets do have to continually drive down the costs of these

technologies, support the right incentives for firms to continually innovate and if we do that right, i think we provide the right continuity over the medium term and the right policy incentives and markets, we can succeed in out-competing china. we can see firms in the united states take root that can deploy their technologies without subsidy and without the need for ongoing public support. >> okay. this is my last question, comment. what we're basically doing is fighting for the future. >> that's right. >> because what we're saying is that we know when these solar, wind, other renewables, other clean technologies, become price-effective and they will, and they can, and they have to, that there is going to be an enormous world market and that

if we don't do this now, we're not going to be part of it. is that correct? >> i think that's exactly correct. i think again we can look at the history of shale gas as a key example. we're not the only country in the world with large shale gas resources. china has even larger amounts of shale gas than we do. south africa, many countries in europe. but it was the united states that developed cost effective shale extraction technologies first and that wasn't because we were the only country with the oil and gas sector, either. it was because of the government partnership with that dynamic oil and gas sector that was able to develop those technologies. now the united states enjoys a massive new source of domestic energy, we have created tens of thousands of jobs in that sector, but if you go back and look, even in 2005 or 2006, not long ago, that sector was a tiny contributor to our national energy system and those technologies were still cost ineffective. so you cross that tipping point and all of a sudden, you have a revolution in our american energy markets and we're exporting those technologies abroad, that expertise to china, now south africa and other countries to help them develop those resources. i think that's a parable for

what we can and should do with other technologies. energy demand in the united states is vast so shale is great for expanding our energy supplies. we can't rest on those laurels. we should continue to develop a diverse source of ever cleaner energy technologies and those same kinds of policies are going to be key to doing that. as you said, winning the future. >> i don't think we can end on a better note. thank you, mr. chairman. >> thank you both very much. very useful testimony and we appreciate it. that will conclude our hearing.

finishing up here with the senate energy committee, to find

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