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At this week’s ARPA-E Energy Innovation Summit in Washington, D.C., politicians from both sides of the aisle, together with environmentalists and business leaders, will do something unusual—they’ll agree on something. They’ll all sing the praises of ARPA-E, the agency created in 2009 to fund the development of early stage energy technologies. But what could get lost in all the laudatory remarks is the fact that ARPA-E won’t solve our major energy challenges and can’t fulfill its mission alone.

That mission has always been limited. Its authorizing legislation directs it to identify promising advances in labs and give them a boost, enough to demonstrate the potential to private investors. A small company or university lab that has discovered a promising material, for example, might be funded to produce a working prototype battery or solar cell. But ARPA-E was explicitly not supposed to take over for venture capitalists in commercializing technology. The agency invests only in projects that are too risky for private investors.  

That the agency was never intended to commercialize technology is clear from its budget. Some new energy technologies will require large-scale demonstrations that could cost hundreds of millions of dollars before private investors are willing to take over. But ARPA-E’s entire yearly budget is less than $300 million, which is spread between dozens of projects. “The parts of the innovation chain that are the hardest in energy are the scaling up and demonstration phases, and that’s precisely what ARPA-E is not designed to do,” says David Victor, co-director of the Laboratory on International Law and Regulation at the University of California at San Diego.

The conventional wisdom when ARPA-E was created was that, if it could get prototypes built, venture capitalists or companies would swoop down and fund the larger-scale demonstrations. To facilitate the process, government loan guarantees could provide companies with the funding resources to prove their technology.

But that vision has run into trouble. Venture capitalists have found that building factories and large demonstration plants is often too costly and slow to result in a lucrative return on their investments. Many have seen companies they’ve poured hundreds of millions of dollars into go bankrupt or sell for pennies on the dollar, making them wary of big energy investments. Meanwhile, federal loan guarantees have also come under fire after some high-profile failures.

As a result, entrepreneurs have had to adapt. Some are focusing on technologies that cost less to demonstrate. For example, some technologies can make use of proven manufacturing techniques. But these are just the sort of relatively safe, incremental improvements that private investment is well-equipped to fund in the first place.

For its part, ARPA-E is trying to serve as matchmaker, inviting deep-pocketed companies when a new program launches to get their feedback and introduce them to researchers. It also requires its awardees to have a plan for after a project is finished. This approach has shown at least some success. One ARPA-E awardee, an energy storage company called General Compression, has partnered with ConocoPhillips on a pilot project in Texas. A group of five awardees working on more efficient heating and cooling systems now has an award from the military to further develop the technology. But these projects are relatively small. The total award from the military was less than $10 million dollars.

DARPA, the agency that ARPA-E was modeled on, had things much easier, says Victor Reis, a senior advisor at the U.S. Department of Energy and a former director of DARPA. He says DARPA had a clear relationship with its customer—the military. Yet even then it took a long time to develop what he likens to a business model for getting innovations deployed. With energy, where you’ve got to work with utilities, regulators, carmakers, and consumers, the situation is much more difficult, he says. “The business model for how ARPA-E works within the energy system is not yet well developed,” he says.

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Tagged: Energy, climate change, electric vehicles, ARPA-E, energy policy, ARPA-E, energy security

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