how we define that as far more difficult than it might sound. let me ask about how we pay for all of this innovation. in my opening statement, i mentioned that one of the things i think makes sense is to take the 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 other possibilities include raising energy prices, but that is kind of tough for us all right now. i think we have looked at that. i am reading your language that says that the aeic does not advocate one revenue option over the other. as one of the individuals on the

committee here, do you think there is one approach that is perhaps better than some of the others that you have outlined for us? >> i suspect once again that some are better than others. the reason we try to make a choice is that we simply did not get into enough detail to bake be due to take a strong position. -- enough detail to take a strong position. today we will send a billion dollars overseas to foreign countries to pay for the net cost of the oil that we buy. for the last two years, have been averaging $2 billion a year on energy research and development a year. that suggests to me that there is great opportunity to find the kind of money we need to triple the research and development, 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 3 cents more to the cost of a gallon of gasoline, back when it cost 50 cents a gallon. i said let's at 2 cents or 3 cents and put that money into research and development. my congress friends tell me i would destroy the economy if we did that. today the money goes to other nations who would like to kill us with the money that we send to them. so there is clearly something wrong with that model. i would hope that we would, in fact, provide a tax on some of the energy sources, some of those that are the high polluting sources, much along the lines you have suggested. i personally do not have a problem with a modest tax at the gas pump, but i realize that is a very difficult issue today.

but the idea of having the industry with the most benefits in the long term paper part of the cost seems appropriate to me, particularly when you have an industry that is spending nearly half a percent of its sales revenues on research and development. the industry i came from, the pharmaceutical industry spends 20%. it seems not unreasonable to me that, given the importance of r&b and the modest pain that would be added by some of these taxes -- i am not a tax bite, but in this case i think it is justified. -- i am not a tax guy. >> one of the ways of getting

to our energy future is using those revenues from our fossil fuels to help build out the technology and the innovation to advance as to the next generation of energy. i appreciate your comments. >> thank you for holding a very important hearing on innovation. always good to see you, mr. augustine. thank you for your continued service to the country. your ideas are always spot on. i hope we will listen to and then implement recommendations. as you point out, we are in the midst of an energy revolution. by that i think we mean all energy sources and all energy technologies. we cannot have inconsistent and uncertain innovation policies.

that is what you have underscored it here and why this hearing is so important. we need to be leaders in this field, and we have always been a paragon of innovation. i think about the fact that we have been leaders in every energy technology. thinking about solar and wind in the 1970's, for example. we are trying to play catch-up to some countries that have seen the possibility. i am honored to represent the state of colorado. we are a national leader in many areas, and we have a great model of how industry, research institutions, and the government are all encouraging energy innovation, which then spurs job creation and economic growth. i would venture to say that means that americans haven't more secure energy and economic future.

thank you for pointing out all these possibilities to us. you talk about arpa-e as a program that we can innovate going forward. would you speak to how this model could be applied in more abroad and specific ways in other areas of activity? >> i would be glad to do that. let me try to describe what i think are the essential facets of arpa-e. arpa was always willing to take risks, and realize that in some cases they would faila.

when they succeeded, it was really an impact full event. they were willing to take risks. they set high goals. they were very decisive in deciding what they would support, and when they could see that something was not achieving what they expected, they stopped it and put the money elsewhere. very important to arpa is that they attracted extremely high quality talent. one of the ways they did that was by delegating a lot of authority to program managers who oversaw the projects. another thing they did, that expected people to only stay there four or five years. they have a lot of rotation of people.

clearly, the best way to freshen an organization is to rotate people through it. the best way to transfer knowledge to other organizations is by rotating people out and into those other organizations. the government has been very constructive in supporting arpa financially so that it has the resources it needs to pursue good ideas. those are the sorts of things -- and also they are problem- solving oriented. >> you are saying you have to be willing to risk failure and you need to revive a lot of space and to decentralize the environment and turn people loose with the goal of not increasing the values of of the product and service by three times. that is not necessarily the way things are done in government or the private sector.

under your tutelage, you would put teams together. in the remaining time i have, let me talk about how we help american households transition into noble energy systems. we now see some creative ways in which -- creative ways in which energy systems are released. center alexander and senator whitehouse have released a bill. i have joined them in cosponsoring that legislation. it creates a secondary market by having the government ensure the value. the cbo score this at no cost. can you speak to that model and

are there other areas you might have identified were can help those who want to make the right investments but find the cost prohibitive or difficult to embrace initially? >> yes, i think the sort of thing you describe 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 to help the consumer afford it. they can certainly be done by subsidizing -- and i don't like the word subsidizing, but utilizing 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.

i think in the grand scheme of things today, we have a remarkable opportunity of bringing together the idea of a horizontal drilling and hydraulic fracturing to recover shale gas to really buy us the time to pursue some of these really promising clean energy opportunities did otherwise we did not have time to pursue them, given our dependency on oil, and there was not much we could do about it. it was not long ago that we were number one in central thermal systems and wind power. today we have lost our lead. i was recently in japan and i was struck by how much we have lost our lead. >> thanks again for your leadership. great to see you. >> senator franken. >> thank you, mr. augustine. we seem to have a debate over the very nature of the role of government in development and new technologies.

again, i appreciate the ranking member being here, but i don't see any of my colleagues from the other side. we have these hearings a lot, and either they don't show up at all, or they come in and make a statement and leave and do not even want answers to their statement. 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 would not have happened without the government.

gps technology would not have happened without the government. civilian aircraft, the way they have developed, would not happen without the government. the internet, darpa. along list of government support -- the long list of government support for all these industries shows what the track record has been. i don't see any reason why the track record would not continue to be -- is there anything a bowel clean energy -- is there anything about clean energy and renewable energy that is by its nature different than all these other things i cite?

>> i think these things have in common the fact that they were high-risk undertakings, offering high pay off. that is not an area that is particularly attractive to the private investor. i think energy fits this very well. energy happens to have additional characteristics. it is very costly to go to nuclear power. you would never get there in the private sector. if you talk about nuclear fusion, that is a 60-year project. i think it is a very important one. >> i know that you mentioned fusion, and that is something i have been interested in. they always said that nuclear fusion is the energy of the future, and always will be. i think that has tremendous promise, and we should continue to invest in that. there has been support for industry for the development of

shale fracturing and directional drilling. that has been done by government support, as well as 20 years of tax credits for production and subsidies. we have to pay for some of this stuff, why not pay for it was some of the subsidies that we are already paying to this very mature industry. it was government support that got shale gas to go from inaccessible to dominating much of our energy sector. then't understand unwillingness of my colleagues on the other side to even the present -- to even the presence -- to even be present and to recognize the role the government has played. you mention energy efficiency, and about retrofitting.

that means things like smart meters to better gauge energy use, or efficient microprocessors to make batteries last longer. batteries are something we have been doing in this latest round of government-funded research. one thing we did in minnesota that has helped create jobs in retrofitting -- and this will be a question, actually. we have an energy efficiency standards that are utilities have to meet. every year, their customers have to improve their efficiency by 1.25%, or 1.5%.

do you think that is an area where if we did that nationally -- because it works in minnesota. the utility companies say they will invest in the retrofit of the customers, lending the money up front, and energy savings will pay for itself. if we did a national, renewable energy standard, not a renewable energy standard, but an 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. there is no one thing that is going to solve it, nor did you suggest that.

but if we can improve either through the use of controllers in power, or the time of day they use energy, or just using less energy, that has to be a clear positive. if it encourages the public to do that, at it is an important thing to do. my bottom-line is that i spent 10 years in the government. i travel to a hundred other countries, and i am a great believer in the private sector doing whatever it can. one area where there is an exception to that, is when the market itself fails. the energy market has failed. 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, and you have been a successful businessman, haven't you? >> i don't know if i have been a businessman. >> i think you have been successful. >> senator murkowski, do you have additional questions for mr. augustine katula >> i do, but i also know we have a second panel coming up. i have to have you fill in the blanks. why do you think the energy sector has failed? what is it about energy that has made it more complicated? >> i think a number of things. one is the high capital cost and a long time that facilities remain in existence, 40 or 50 years. more importantly, it has been a highly regulated industry. the oil industry is controlled by cartels abroad. the free enterprise system has generally not found its way into

the energy market. one of the things that you all could do is to help bring the free enterprise system into the market. >> mr. augustine, thank you very much for your testimony and the good work that has gone into these reports. we appreciate it very much. >> thank you, is always a privilege to appear before this committee. >> let's go to our second panel. we have two witnesses on our second panel. we have had a policy analysis with bloomberg new finance. he has testified with us before. mr. jesse jenkins is also here. he is the director of energy in climate policy with a break through institute in oakland, california. we are told that today is your birthday as well, mr. jenkins. congratulations, it is big day for birthdays. >> we have cupcakes in the back.

>> 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. we will include your full testimony in the record and then we will have some questions. >> thank you. but morning, ladies and gentlemen. it is and honor and privilege to be here before the committee. and join in my role as analyst with bloomberg new energy finance division, focused on the clean energy sector. our group provides data and insight on investments, the technology, and trends in clean energy. my remarks represent my views alone and not the corporate position of either bloomberg r bloomberg new energy finance.

the report examined the various challenges facing technologies looking -- technology companies looking to scale up while driving their costs down. other studies have since explored this area in greater depth. the most notable has been the american innovation council's work, which examines the same valley of death conundrum, but with a focus on american competitiveness.

the clean energy sector has seen significant growth in recent years. new investment in the industry rose to $263 billion last year. in the fourth quarter of 2011, our firm counted the one trillion new dollar invested in the sector. we have seen clean energy technologies making important progress. the price of a solar modules has dropped by more than half in just the last 16 months. the efficiency wind turbine continues to improve. the price for lithium batteries are starting to take down. a substantial part of this process is a result of innovation. as production of this equipment is cramped up, per unit costs have come down.

all this raises a question of whether or not the capital markets are providing sufficient financing to address the valley of death conundrum. i would argue that they do not. the vast majority of new capital entering the clean energy sector is directed towards well- established low-risk technology. $5.1 billion of the $263 billion that we track last year came in the form of venture capital. within their portfolio, but they are now spending less money on the early stage companies and making fewer investments in new companies. the so called the valley of death has not been purged so far. the riddle of the later stage commercial -- commercialization valley of death also remains unsolved.

new biofuels, solar, and electric vehicle companies raise billions for their ipos. the public market fundraising has all but evaporated in recent quarters for clean energy. there remains to be seen if any of them will be able to float their shares. there does seem to be an appetite for investors for dot.com companies. the risk appetite for clean energy companies is different at this particular moment. i would like to take a moment to address the question of where the u.s. stance in comparison to its peers. i would emphasize, development and deployment should be addressed separately.

and deployment, there could be little debate that the u.s. trails nations in terms of the installation of new clean power generation. the same goes for the manufacturing of that conventional equipment. with the u.s. of the lagging behind china and others. there remains much -- the clean energy marketplace cannot be sustained by subsidies for ever. we are seeing signs of declining support from governments around the world. the industry must compete and be its rivals on price without government support. this is already occurring. the day when that happens far and wide still lies ahead. when it arrives, will the u.s. be home to the most critical technologies? will the u.s. be a market maker for these technologies? this remains free much to be seen, but there are hopeful

signs. the country is home to world class research institutions and laboratories. it is a hub for venture investing. no nation may be better position to own the long term energy technology future than the united states. the only question is whether these resources could be coordinated to maximum advantage. that is where public policy must enter the picture. i look forward to your questions. >> thank you very much, mr. jenkins. >> i direct the energy and climate program at the break through institutes based in oakland, california. it is an honor to appear before you today. advance energy policy and markets are now at a key inflection point. in recent years, u.s. advance

energy sectors have grown rapidly. adding jobs even through the depths of the recession. a recent -- nearly all advanced energy sectors currently rely on public policy support to gain at expanding foothold in today's well-established energy market. that policy support -- total annual federal spending supporting surged to $44.3 billion in 2009. it is now poised to decline 75% by 2014. that is according to original analysis of 92 federal policies conducted by the breakthrough institute. of the 92 programs we examined,

a full 70% are now set to expire by 2014. the topic of this hearing is timely. with the u.s. advanced energy policy system said to be wiped clean in the coming years, we recommend smart energy policy reform along to keep fronts. energy deployment subsidies and policy should be reformed to better dried and reward innovation and of advanced energy sectors toward subsidy independence as soon as possible. we should strengthen our federal energy are indeed -- richard and development -- research and development. i am happy to discuss those topics in greater detail. i want to focus on subsidy reform. when discussing the role of government in energy innovation,

it is important to note that energy is a commodity. we do not care much about the quality -- but we care about are the products and services we derive from those fields. electronics command a price premium from customers by offering a new value-added features, new energy technologies must compete on price alone right from the get go. this is an extremely challenging task, especially when facing competition from fossil fuels. it helps explain why the government must play a more proactive and extended role in driving energy innovation than in other sectors. in light of this, the government's role is critical at least two fronts. policy is key to jump-start market demand for nascent energy technology that cost more than conventional fuels and when not attract private-sector investment.

government policy must strive -- drive steady innovation, costs decline, and technology improvement that can advance these maturing sediments. with federal funds poised to contract, we believe now is the time to reform energy subsidies to ensure they officially accomplish both of these objectives, driving market demand and continue innovation. we should not abandon today's advanced energy sectors. neither can we afford to subsidize these industries without making steady product -- progress on price and performance. we all line a set of criteria for energy subsidy reform to ensure that these policies will reward companies for developing and producing and improving energy technologies. optimized deployment policy should establish competitive markets among technologies at similar stages of maturity. they should avoid walking out new technology to promote i

divorce energy portfolio. bishop provide sufficient certainty and they should back -- they should provide sufficient certainty and -- sufficient certainty. market trading deployment policy should provide only targeted and temporary support for technology's there still maturing and improving. they should be designed to drive and reward performance improvements and should reduce subsidy levels and public support as these technologies improve. these subsidies should fade away entirely as advanced energy sectors. the role of government and driving markets and innovation should be limited and iraq. the goal should be to help develop a robust industries that can stand on their own and thrive without public subsidies as soon as possible. i look forward to discussing those in more detail. thank you for considering these recommendations.

thank you. >> thank you very much. i believe the center wanted to make a statement. >> -- the center wanted to make a statement. >> i have to attend an appropriations markup. i am intrigued by some of your proposals, mr. jenkins, about how we really do get to reform some of our subsidies and how we figure out the ramping. i do have a series of questions, but i would like to submit them to the record and perhaps he would have an opportunity to visit outside of the committee to follow up on some of the proposals. this is an important topic and i think we all recognize that the energy sector is one where things are constantly evolving. how we appropriately integrate the federal government into the

incentive process is an important one. thank you, mr. chairman. >> thank you. let me go ahead with a couple of questions. one of the policies that some governments have pursued is to establish a so-called clean energy banks to help with deployment of clean energy. i believe the united kingdom and australia have moved ahead with this. could you describe what this phenomenon is? and what he think the benefits might be if we were to consider that? or if you do not think it makes sense, say that as well. go right ahead. >> as you are well aware, there

has been some attempt to establish a clean energy deployment administration. i think it is important to mention at the same idea is being pursued by other countries around the world. australia is close to finalizing. india has made some announcements, but that plan has not moved forward to far. the basic idea cobol these institutions is to create a separate -- of these institutions is to create a separate -- and can operate relatively autonomously in making investments in new technologies. and then as those technologies developed, they get a return on

bad investment that they can reinvest and continue on. it does start with a nut of government money, but then it becomes self sustaining. one of the interesting advantages of this model is by breaking in and out of government infrastructure, if 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 than you might get through a highly regulated government programs. that is the idea, generally speaking, and it is intriguing. what is most interesting about it is the ability to address the so-called demonstration the valley of death. that is under $200 million that might be needed to build the next generation biofuel plant. that capital, banks will not

lend because they have the money, but they do not want to take that much risk. the injured cabalists do not have that much money to make on a single out -- the venture capitalist do not have that much money to make on a single bat. an institution like that is willing to provide a large amount of capital at a higher risk rates and offers potential. >> let me ask mr. dinkins a question. you list -- mr. dinkins a question. your list several policies that could be structured to accomplish some of the objectives. one of the policies you mentioned is reverse auction incentives. he said those could be established for varying technologies to drive industry competition and innovation. i was wondering if you could elaborate on that if a bit and tell us how you think that might work and whether there are

examples of that we ought to look back. >> senator frank and mentioned the role of government -- franken mention the role of government. reverse auctions have a potential to play the same kind of role. in southern california, utilities are using reverse auction programs. to use the reverse auction mechanism, to create a competitive market opportunities for their projects -- the winning bids have strong penalties for

noncompliance, which is a critical aspect. southern california utilities are procuring several hundred megawatts of solar at close to $90 per megawatt power. it is a model that has been used in other markets in india, china, brazil. to varying degrees of success. i think it is a model that meets many of the criteria. it's steadily drives down price because it is constantly driving competition. it is one of the policies we should look very closely at. some of the colleagues on the republican side of the aisle have proposed similar mechanisms for biofuels for deployment of wind or solar.

it seems like an idea that has been bouncing around as well. we should take a closer look at it. >> thank you, mr. chairman. i spoke earlier about igovernmet support for industry, for oil industry, and gas industry, and support for the industry and the development of shale fracturing. can you talk a little bit about that? >> this is the result of an independent investigation.

to piece together what was the process of development of the key technologies that enable the shale gas. what we found is the role of government in supporting innovation and the private sector was critical to the development of a number of the technologies that were needed to unlike on recoverable shale resources. that includes the eastern and shields project, there were undertaken in the 1970's. the collaboration with the gas research institute, which is an interesting model, that received partial funding from the federal energy regulatory commission. gri was funded by a user surtax on gas transmissions fees.

we set aside a little bit of that fund to drive further innovation in that sector. we think it is an intriguing model. early technologies were also developed by a department of energy. they played a key role developing imaging technology to detect potential fractures and collapses in coal mines. that was a key technology that was later applied to understanding the geology of shale deposits and understanding are the fractures' would appear -- occur. beyond the initial demonstration, at there was also a period of time when the shell was recoverable, but expensive compared to more conventional extraction technologies.

this is the second key role that the government has to play. they instituted the section 29 tax credits. that was in place from 1980 until 2002. they made it profitable for the private sector to continue to develop. without that tax credit, there would have been a profitable return for private-sector innovators. >> the government brought an industry, created the technology that made it possible, which is the first valley of death. and created the market and subsidized it for the second valley of death. when my colleagues on the other side, who are not here, when they sing the praises of fracturing and demonize government involvement in

picking winners and losers, it seems like they do not know the history of this industry. would that be a fair statement? >> i do believe it would be. the government has played a substantial role in partnering with the private sector. the risks, the capital requirements, the time horizon that is required to drive these new technologies forward are really prohibitive. that is where these things fail. you need a partnership between smart government policies in a limited and targeted way to address those barriers and that will unlock the private sector to do what it does best. >> i will take that as a yes. mr. zindler, this is what the chairman was asking about and i think you spoke to it, but i wanted to specifically talk about the clean energy

development administration in reseda. do you think that is a useful model as a way of helping to get over the second valley of death? >> potentially. it certainly has that opportunity. there is a short circuit in the market, as i sort of tried to articulate. i do not know if i did earlier, but basically, that there is not the right money out there for this kind of task, for large scale demonstration projects. whether it is borussia or some other model or maybe you'd change the -- whether it is reseda or some other models are made you change the tax codes, it is screaming out for some kind of solution. there are a number of interesting ideas out there and that is certainly one of them. >> thank you. >> did you have any additional questions? if not, we can conclude the hearing at this point.

>> i do not want to put a crimp in your day, but -- >> go right ahead. that is what my day is for. >> i wanted to ask about china. sometimes 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 intellectual property, 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 solutions to this problem. do either of you have any opinions on how funding agencies can better protect taxpayer funded technologies? >> i will take a crack at that. it is a tough question, obviously. the u.s.-china clean energy trade relationship is a very interesting juncture. as you may have seen last week, the department of commerce announced fairly substantial tariffs on chinese goods, solar equipment imported into the united states. there is some tension there. i will tread carefully in my remarks on this. to some degree in -- to some degree, the chinese government made remarks about clean air a few years ago when it made it

difficult for outside companies to compete for contracts there. and in the meantime, we sought a scale up of domestic wind turbine manufacturing in china, and particularly for solar pool takes over that time frame -- solar voltaics over that time frame. on the one hand, i understand protecting jobs and intellectual property. on the other, it is important to note that the cost of solar, for instance, has never been cheaper. >> and that is what undercut solyndra. that was part of the solyndra story. >> part of the issue is that -- solyndra is an interesting example of a company that was trying to look longer-range about driving down costs and got caught up in what was going on at that moment. the conventional solar simply

scaled faster and prices have come down faster. >> in that way, 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, they were under cut in their long- term viability. it became longer-term. because they have higher quality, but a more expensive product, right? >> they were looking further down the road and basically, the future are arrived faster than they had anticipated. it happen for a number of reasons. it was not just that the chinese had scaled up. we have seen capacity come on line in taiwan and other places as well. the solar market has a very rapidly expanded, and frankly, gotten a little bit ahead of itself in the last couple of years and that has driven down prices sharply. >> mr. jenkins? >> the current markets for today

for advanced energy technologies are substantial. but there are almost -- they are almost entirely government- created markets, whether in china or elsewhere. we have to keep our eye on the ultimate prize, which is the development of cost-cutting advance energy technologies that can scale a $5 trillion energy market without subsidies. the game in the long term is who can develop the technologies that are competitive enough to export to global markets. 90% or more energy demand growth is coming outside of the zero weeks -- oecd countries. those countries are going to be unwilling to subsidize. one thing to focus on is to enhance competition and to reduce taxpayer investments now. the investment in the markets do have to continually drive down the cost of these technologies.

support the right incentives for firms to continually innovate. if we do that right, if we provide continuity over the medium term and the right policies and incentives in the market, we can succeed in and out competing china. they can employ their technology without subsidy and without the need for ongoing public support. >> this is my last comment and question. what we are doing is basically buying for the future. >> that is right. -- providing for the future. >> that is right -- vuing -- vying for the future. >> that is right. >> when these other technologies become price effective, and they will and they can because they have to -- there will be an enormous world market. if we do not do this now, we

will not be part of it. is that correct? >> i think that is exactly correct. we can look at the history of shale gas as a key example. we are not the only country in the world with large shale gas resources. china has more than we do. south africa, many countries in europe. but it was the u.s. that the -- developed shale extraction technologies first. and it was because of the government partnership with the dynamic oil and gas sector to develop those technologies. now the u.s. enjoys a massive new source of domestic energy and we have created tens of thousands of jobs in that sector. but if you go back to 2005, 2006, that was a tiny contributor to our technology systems and those were still cost effective. you cross that tipping point and you have -- and still were not cost-effective. you cross that tipping point and you have cheaper resources. that is a parable for what we

can and should do with other technologies. technologies. shale