Rethinking the role of government in cleantech

Another year, another wringing of the hands over tax credits and incentives for clean technology.

Lobbyists and vendors in the U.S. are once again singing the blues, calling for continued and expanding government investments in clean technology. At the same time, political challengers continue their Solyndra hootenanny, raking the current administration for how it spent hundreds of millions of taxpayer dollars.

One can’t help but wonder whether it’s time for a different tune when it comes to government involvement in cleantech.

Perhaps conversations about policy support should be less about giving more taxpayer money to prop up the space, and more about elected officials setting long term market stability and enabling the private sector to deploy capital to assume risk in cleantech. 

Why? First, some background…

Down with incentives
Every time U.S. tax credits for renewable energy development come up for renewal, the cleantech sector cringes at having to once again “play chicken” with whichever administration is incumbent at the time.

The U.S. Production Tax Credit (PTC), which provides a 2.2-cent per kilowatt-hour benefit for the first ten years of a renewable energy facility's operation, was born in 1992. But it’s had a hardscrabble life, clinging to life support after seven one and two-year extensions bestowed alternately by Republican and Democratic Congresses. Neither major American party has been willing to show long term incentive support for renewable energy.

The PTC for incremental hydro, wave and tidal energy, geothermal, MSW, and bioenergy was extended until the end of 2013. But the production tax credit for wind expires at the end of 2012. And that’s got wind lobby groups girding up. In a recent statement, American Wind Energy Association (AWEA) CEO Denise Bode cited a study suggesting Congressional inaction on the PTC “will kill 37,000 American jobs, shutter plants and cancel billions of dollars in private investment.” The same study suggested extending the wind PTC could allow the industry to grow to 100,000 jobs in just four years. Expect this battle to simmer all summer.

The unpredictability around cleantech incentives is taking its toll. “The U.S. is hitting a brick wall with the cessation of benefits,” remarked John Carson, CEO of Alterra Power, on the subject at a recent cleantech investment conference I co-chaired in Toronto. He wasn’t happy, and do you blame him? Nobody likes living hand to mouth. But that’s what happens when you rely on credits and incentives like the PTC or its loved and loathed counterpart in the U.S., the Investment Tax Credit (ITC).

And then there are the cleantech subsidies provided by the American Recovery and Reinvestment Act of 2009 (ARRA), which are now winding down.

If it feels that clean technology vendors and lobbyists are spending an undue amount of energy and resources chasing such subsidies worldwide, they likely are.

Up with mandates and standards
Rather than funding and administering subsidies to help the clean and green tech sectors find their footing, a case could be made that governments should focus on passing aggressive policy mandates, standards and codes.

Instead of using taxpayer money to make technology bets, regional and national governments could focus on passing laws, including broad brush stroke ones like the renewable portfolio standards in the U.S. that mandate a certain percentage of power from renewable sources by certain dates, and then step back and let the private sector figure out how to deliver. Or mandate change more granularly—for example, that coal power plants need to meet certain efficiency or emissions standards by certain dates, and, again, let the private sector figure out how. (Ironically, if there were more public support to actually clean up coal power instead of simply disingenuously parroting, beginning in 2008, that “there’s no such thing as clean coal,” throwing up our hands because environmental ads told us that “clean coal doesn’t exist today”—and that translated into political will and a mandate—cleaner coal power could exist today. Yes, there’d be a penalty on the nameplate capacity of plants’ output, but there’d also be billions saved in health care costs. But we digress.)

Taxpayers should take their politicians to task for trying to play venture capitalist, i.e. by investing their money in trying to pick winners (a la Solyndra) in complicated markets. Professional venture capitalists themselves, who focus on their game full-time, barely pick one winner in 10 investments.

Drawbacks of incentives
How could government grants, loans, tax credits and other subsidies possibly be bad in cleantech? Free money is good, right? Here’s a list of drawbacks to these incentives, some of them not as obvious as others:

  • They can go away and cause market disruption – to wit, the points earlier in this article.
  • The existence of loans and grants silences critics – Few speak out against pots of free money, because they might want or need to dip into them in the future.
  • Incentives favor only those willing to apply for them – and therefore are often missed by companies working on disruptive, fast-moving tech, or who are focused on taking care of customers’ needs.
  • Criteria are often too narrowly defined – Criteria for incentives often favor certain technology (solar photovoltaic over other solar, or ethanol over other biofuels), and as a result, lock out other legitimate but different approaches.
  • Picking winners means designating losers – Recipients of government grants or loan guarantees get capital and an associated halo of being an anointed company. Those that don’t are comparatively disadvantaged.
  • Not the best track record – Incentives go to companies best staffed to apply for and lobby for them. And those aren’t necessarily the companies that could use the capital the most effectively, e.g. to compete in world markets, or create the most jobs.

What governments could and should be doing
In the cleantech research and consulting we do worldwide at Kachan & Co., we’ve come to believe that governments are best focused on activities to create large and sustained markets for clean technology products and services.

Doing so gives assurance to private investors that there will be continued demand for their investments—one of the most important prerequisites to get venture capital, limited partners and other institutional investors to write large checks.

Given that objective, governments should, in our opinion, pursue:

  • Setting mandates and standards – e.g. the amount of power generated from renewable sources, new targets for fuel efficiency, green building or other dimensions.
  • Improving codes and other regulations – making building codes more stringent could drive energy efficiency, green building and smart grid investment.
  • Building the talent pool
  • Stabilizing the economy
  • Fostering political stability
  • Commitment to infrastructure projects – including water, transportation and grid.
  • Building showcase projects – regions wanting to foster local cleantech can do as Abu Dhabi has done with its Masdar initiative, as Saudi Arabia is now doing with solar, or as China has done with hundreds of green development zones; in doing so, all three of these countries have sent strong signals to large corporations and investors that they view clean technology as strategic.
  • Rolling back so-called perverse government subsidy support today of the fossil fuel industry, including direct and indirect subsidies.

Cities as test beds of policy innovation
Interestingly, cities are emerging as petri dishes of progressive cleantech policy, and are increasingly where such innovation is taking place.

For instance, Barcelona has established that large companies need to create as much as 30% of their power from solar thermal technologies. The city of Berkeley, California pioneered what is now known as Property Assessed Clean Energy (PACE) financing, wherein property owners are able to pay for energy efficiency and renewable energy improvements on their property taxes. This month, Phoenix, Arizona introduced what it calls the largest city-sponsored residential solar financing program in the U.S. And New York City is taking the lead in residential demand response by trialing a program to curtail the consumption of 10,000 room air conditioners at times of high demand.

Given the world’s current financial malaise, and especially in light the Occupy momentum globally, I’m surprised more folks aren’t questioning how their governments spend their money in cleantech. Because, as described above, there are other arguably more effective ways elected officials can help usher in a cleaner, greener future than throwing around billions in incentives.

After all, how much fun would a pristine planet be if we’re all destitute because governments have crumbled under crushing debt?


A former managing director of the Cleantech Group, Dallas Kachan is now managing partner of Kachan & Co., a cleantech research and advisory firm that does business worldwide from San Francisco, Toronto and Vancouver. The company publishes research on clean technology companies and future trends, offers consulting services to large corporations, governments and cleantech vendors, and connects cleantech companies with investors through its Hello Cleantech™ programs. Kachan staff have been covering, publishing about and helping propel clean technology since 2006. Details at Dallas is also executive director of the Clean Mining Alliance.


Saw this originally on the Energy Collective

I wanted to take a minute to come over to your home site- and drop a quick note to say how clear and well thought out this article is. I agree with many of your points- (but I think that there may still be an enhanced role for government when capital markets freeze)

Being from the the Philadelphia area, I wanted to note an amazing example of your point-

Delaware lost both it's GM and its Chrysler Car plants back in '08-'09.

The GM plant went to Fisker Automotive, which benefited from some early DOE initiatives. Given current challenges it may (or may not) build its new "Atlantic" model there. Right now, its battery partner, A123, is troubled as well, and it also received some early Government seed money for a plant in Michigan

The Chrysler plant was razed, and sold (given) to University of Delaware. Bloom energy is soon to build a Solid Oxide Fuel cell plant on the site. This is former NASA technology, made commercial in the private sector. (But government technical help was never that far) Now, Bloom boxes can be an efficiency game changer if used in a CHP application.

Same state, same worker base- an interesting case study.

I would suggest that we have to be careful with a once size fits all statement about government's role though, as both Space X and Tesla (both Elon Musk initiates) each are doing rather well (as is his Solar City), as the heavy government involvement in each will soon taper off. (Earlier in Tesla's case obviously)

Tesla is also now located in a former GM plant. (but will be inheriting Toyota's great work team model and processes) Lots of one time only government help getting Tesla that plant in Fremont, Ca.

Perhaps we can tweak the model- Government does basic research, government then sponsors more effective incubators and technology transfers. One wonders whether DOE's small new innovation hubs might prove effective.

After a technology has been proven as possible/doable Government then sets tough standards, and beefs up enforcement (as you've suggested)

The problem is, that for decades now, standards have been beaten back by lobbyists and instead we got the following :

Al Gore pushed Clinton hard for more Fuel efficiency back in '93. The car companies fought back- so instead we got PNGV & USCAR. Bush team changed that to Freedom car. We also have the Advanced Battery consortium.

So what do we have for all that partnership money and award winning technology?

We have some new cleaner paint processes for cars, an awfully advanced Chevy Volt, and some interesting Ford Electrics and Plug in hybrids coming.

The rest of the research seems to have stayed on the shelf- but perhaps it's in the knowledge base of the engineers who will need to design to the new 54.5 mpg cafe standard.

Was that worth it?

The government has been spending big money on expensive "Big science" programs for years. From breeder reactors to superconducting supercolliders, to supersonic/hypersonic planes that never fly, to launch pads for rockets that never get built. A frightening amount of waste. Hundreds of billions over the years... As egregious as that waste is, I don't know if that type of spending will ever stop-

Yet, on the success side, we have Sematech- which has kept us competitive in the chip industry.

So, I think a case could be made for "less is more" - In concert with strong sunset clauses in any funding contract or subsidy.

We need a new class of better trained public managers/technology policy makers, and a new paradigm for light investing in a multitude of nascent technologies. That effort can then be backed up by a predictable set of standards, once those standards have been proven technically achievable, as well as affordable to meet in a competitive and sustainable manner.

I enjoyed reading your post.

In your list of drawbacks of incentives you might also add that in subsidizing an existing technology in order to allow it to "compete" in the marketplace, the subsidy takes away incentive to develop or try new prospectively lower cost approaches since anything new is risky and costs money to develop. This has clearly happened in the wind energy industry.

Thanks for your blog!

The topic is actually one of the most frequently discussed in my school. I agree with your taking on the types of policy governments should adopt. An energy professor here once called incentives "drugs" because it is painful to get rid of. The CEO of Horizon Wind came to talk at my school a couple of weeks ago and showed us exactly how painful it is. He spent more than half of the time complaining about the uncertainty and intermittency of renewable polices in the U.S. I think EU have made similar mistakes by subsidizing certain technologies instead of leaving the decision to the market. Apart from mandates and standards you mentioned in the blog, I also believe that the government should shift more funding towards underlying scientific research and be realistic about the chance of success. I think the large wave of criticism towards the decision-making behind Solyndra bankruptcy carries too much sentiment.

What you said about cities being tests beds is very interesting. Coming from China, I inevitably think about how certain polices would work under China's context. I believe how cities are going to be built in China and other developing countries have big impact on world's energy consumption and policies of higher level are needed to make sure that these cities are not trapped in the path dependency of high energy intensity and low land use efficiency, which is prevalent in the U.S. So I guess for developing countries, cities are better not left as test beds.

Excellent Post ~ were you reading my history that validates many of the things you accurately state? You should have included grants to professional grant writers. As my experiences and a study by our regional newspaper show, only about 8% of grants result in viable products.

In brief, I have developed a transformational method of construction to bring it out of the 18th and into the 21st century. PATH’s first director described it as “doing to construction what Henry Ford did to the automobile”. We are projected to match Ford in both lower cost and improvement in quality. Upon seeing it, a HUD director projected that every working family in America will be able to acquire a quality new home on 30% or less of their income (only 46% can today). So HUD took my specifications, broke them into 5 segments and purposely configured the grants to try to avoid the pros including requiring product within 18 months. Didn’t work. We didn’t even make the final 60, more or less the final five. It is many years later and still not a single product from the recipients.

Upon seeing what we have, a DOE director put pressure on us to bring the BIPV portion to fruition first “Because America needs it now”. So we did. The result is a method to encapsulate most manufacturers’ systems resulting in a built-in roof/wall that offers all 6 forms of solar at a cost below that of a current non-solar roof BEFORE tax credits/incentives/rebates. When presented to the DOE director, he apologized stating “But we have no funds for you.”

Fortunately we are a semifinalist in the Clean Tech Open. Their people have taken us under wing, refined our package and now, instead of needing $3 - $4 million to bring the Transformational system to market, they have encouraged us to first create a Transitional construction system that will take less than $250,000 for the dies and to build a leading-edge, environmentally friendly, plus-net energy prototype house as well as a prototype classroom that exceeds what studies in North America and Europe dramatically increase student learning retention. We are to first bring these to the attention of our waiting list of prospects, introduce them to the marketplace and gradually bring the Transformational system to market piece by piece.

So, we are seeking an experienced business manager/partner with the funds to help bring this to fruition without the need for government funding.