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 fracturing and directional 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 that 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 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. i'll lend them 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 a 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, nor did you suggest that. but if we can encourage the public either through the use of controllers and their power, or 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 -- maybe not startups, but se but certainly dot-com companies. 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 be addressed 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. with three out of four venture capital dollars for clean energy coming from the u.s. 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'm jesse jenkins. 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 institutions 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 value 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 as you know, and i think it's important to mention, the 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 3 billion pounds. the basic idea of all the institutions is to create a separate entity that gets them funding from government. and then can essentially operate in making investment in new

technologies. as the technologies develop, and the winners, they get a return on the investment to 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.