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Report of the EPA-Venture Capital Community Summit: Exploring ...


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Report of the EPA-Venture Capital Community Summit: Exploring ...

  1. 1. Disclaimer The information in this report has been reviewed by the EPA and Venture Capital Com- munity participants in the Summit. It also has undergone EPA administrative and general counsel review. It does not necessarily reflect the views of the Agency, however, and no official endorsement should be inferred. EPA/600/R-09/023 U.S. Environmental Protection Agency Office of Research and Development June 2009
  2. 2. This report was prepared by The Scientific Consulting Group, Inc., Gaithersburg, Maryland, under EPA Contract EP-C-05-015, Work Assignment 3-4. Paul Shapiro was the EPA Work Assignment Manager.
  3. 3. Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology Table of Contents Introduction ............................................................................................................................................... 1 Agenda of the EPA-Venture Capital Community Summit .............................................................................3 Summary of the EPA-Venture Capital Community Summit .........................................................................5 Welcome ........................................................................................................................................... 5 Introduction to Venture Capital and Growth .................................................................................... 6 Introduction to How EPA Operates .................................................................................................. 9 Discussion of the Venture Capital Report Recommendations, Especially Related to Beginning and Sustaining Communications.................................................................................. 12 Working Lunch – Overview of the New Department of Energy Technology Commercialization Programs ....................................................................................................... 16 Discussion of Alternative Financing Instruments: Loan Guarantees, Loans, Venture Capital Funds, Grants, etc. .............................................................................................. 21 Public Comments............................................................................................................................ 26 EPA and Venture Capital Roles and Next Steps .............................................................................. 27 Appendices .............................................................................................................................................. 33 A. EPA-Venture Capital Community Summit: Potential EPA Follow-Up Activities ....................... 35 B. List of Summit Attendees .............................................................................................................. 36 C. Summit Presentations..................................................................................................................... 39 1. Venture Capital Overview ..................................................................................................... 39 2. U.S. EPA: The Context for Promoting New Environmental Technology ............................ 42 3. DOE Commercialization: Energy Efficiency and Renewable Energy .................................. 45 D. Stages of Investment ...................................................................................................................... 48 E. Federal Register Notice for the EPA-Venture Capital Community Summit ................................. 49
  4. 4. Introduction The EPA-Venture the agenda included Public Comment time. Capital Community EPA created a Web site ( Summit: Exploring venturecapital) for the event that includes the Programs to Commercial- Venture Capital Report and two prior NACEPT ize Environmental Technology was convened reports on how to better coordinate EPA’s by EPA as part of the Agency’s response to the technology programs and to work with partners in recommendations in the EPA National Advisory the marketplace. Council for Environmental Policy and Technol- ogy (NACEPT) report titled, EPA and the Venture This report contains summaries of the comments Capital Community: Building Bridges to Commer- made by participants during the EPA-Venture cialize Technology. This Venture Capital Report Capital Community Summit. The report also was submitted to EPA’s Administrator in April includes three presentations that were made at 2008. the Summit to provide background information for the participants. These presentations were: NACEPT operates under the Federal Advisory “Venture Capital Overview,” by Emily Baker of the Committee Act (FACA), which permits it to make National Venture Capital Association; “U.S. EPA: consensus recommendations to EPA. NACEPT is The Context for Promoting New Environmental one of the few EPA FACA groups that provides Technology,” by Walter Kovalick of EPA Region 5 advice directly to the Administrator. The Sum- (Chicago); and “Department of Energy Technology mit, in contrast, was an EPA meeting that was not Commercialization: Energy Efficiency and Renew- convened under FACA and the group was not able Energy,” by Drew Bond of the Department of asked to reach a consensus or provide recommen- Energy’s Office of Energy Efficiency and Renew- dations. Ideas put forth by individuals were noted, however, and are described in the Summary in this able Energy. report. Importantly, the report also includes a list of The Summit was a public meeting designed to potential follow-up items developed by EPA to address two recommendations in the Venture encourage environmental technology investment Capital Report: (1) EPA should forge and sustain and commer-cialization. This list is provided as communications with the early-stage investment an appendix because it was developed after the community and (2) EPA should strengthen Summit (see Appendix A). financial support (e.g., loan guarantees, grants, revolving loan funds) for environmental technology If you have any questions, comments, or interest commercialization. The meeting was announced in pursuing these ideas with EPA, please contact in a Federal Register notice (see Appendix E) and Paul Shapiro at Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 1
  5. 5. 2 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  6. 6. Agenda of the EPA-Venture Capital Community Summit EPA-Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology November 12, 2008 AGENDA Co-Chairs: Rob Brenner, U.S. Environmental Protection Agency (EPA) Hank Habicht, SAIL Venture Partners Purpose: To put forward and discuss a set of potential EPA and venture capital community actions to catalyze the commercialization of environmental technologies. Background: This Summit is a followup to the recommendations in the EPA National Advisory Council for Environmental Policy and Technology (NACEPT) report, EPA and the Venture Capital Community: Building Bridges to Commercialize Technology (April 2008), which is available at recapital. 9:30 a.m. – 10:00 a.m. Registration 10:00 a.m. – 10:05 a.m. Welcome Rob Brenner, Director, Office of Policy Analysis and Review, Office of Air and Radiation, EPA, and Hank Habicht, Managing Partner, SAIL Venture Partners 10:05 a.m. – 10:25 a.m. Introduction to Venture Capital and Growth Emily Baker, Director, Federal Policy and Political Advocacy, National Ven- ture Capital Association 10:25 a.m. – 10:45 a.m. Introduction to How EPA Operates Walt Kovalick, Assistant Regional Administrator for Resources Management, Region 5, EPA 10:45 a.m. – 12:00 p.m. Discussion of the Venture Capital Report Recommendations, Especially Related to Beginning and Sustaining Communication • Desired Outcome: Develop an initial list of actions that individuals believe would enhance communication over the long term 12:00 p.m. – 12:30 p.m. Working Lunch – Overview of the New Department of Energy (DOE) Technology Commercialization Programs Drew Bond, Director for Commercialization and Deployment, Office of Energy Efficiency and Renewable Energy, DOE Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 3
  7. 7. • Desired Outcome: Begin discussion of DOE’s commercialization programs and how individuals believe similar programs at EPA could advance the Agency’s mission 12:30 p.m. – 2:30 p.m. Discussion of Alternative Financing Instruments: Loan Guarantees, Loans, Venture Capital Funds, Grants, etc. • Desired Outcome: Develop an initial list of actions that individuals believe would be helpful in exploring new EPA financial programs 2:30 p.m. – 2:45 p.m. Break 2:45 p.m. – 3:00 p.m. Public Comment 3:00 p.m. – 4:30 p.m. EPA and Venture Capital Roles and Next Steps • Desired Outcome: Discuss the morning and afternoon lists and ask individuals to put forward potential actions they consider most impor- tant for EPA and the venture capital community to pursue to catalyze the commercialization of environmental technologies 4:30 p.m. Adjournment 4 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  8. 8. Summary of the EPA-Venture Capital Community Summit Welcome Rob Brenner, Office of Policy Analysis and Review, Office of Air and Radiation, EPA; Hank Habicht, Managing Partner, SAIL Venture Partners Rob Brenner opened the meeting by welcom- is very timely for the Agency to initiate communi- ing everyone to the Summit. He explained that cations with this community. he and Hank Habicht were the co-chairs of the Summit. Mr. Brenner then asked everyone to As a former EPA Deputy Administrator, Mr. Habicht introduce themselves. He then introduced Paul expressed his appreciation for the Agency senior Shapiro and thanked him for planning and orga- managers who were participating in the Summit. nizing the Summit. He complimented these managers for their abili- ties to promote environmental protection and their Mr. Brenner described why the Summit was openness to consider new ideas and approaches for of great importance to the U.S. Environmental raising environmental performance. Mr. Habicht Protection Agency (EPA). Traditionally, the avail- mentioned the book, The Prophet, by Kahlil Gibran, ability of commercially available technologies, such which was popular in the 1960s. That book includ- as flue gas desulphurization devices for power ed a statement that went something like “I wasn’t plants and catalytic converters on cars, has assisted put in this world to make you happy and you were the Agency in the development of standards and not put in this world to make me happy; each of us regulatory policy. More recently, some states such has to do our own thing, but if in the end we find as California and Massachusetts have enacted pro- each other then it’s beautiful.” Concerning today’s gressive energy and environmental legislation and meeting, Mr. Habicht explained that the VC com- become regional centers for venture capital (VC) munity is not in business to make EPA successful investments and emerging environmental technol- and vice versa but he hoped that at the meeting ogy development. Potentially, EPA could learn today each party will have found each other and from these state models and determine how the that at the end of the day each of us will say it is Agency could structure programs and regulatory “beautiful.” policy to encourage the development of emerg- ing technologies that can enhance environmental Clean technology is not a passing fad or a “flash protection. Rather than waiting for commercial in the pan.” Mr. Habicht suggested that there is technologies to become available, EPA may be able a convergence of issues and challenges that has to become more proactive and influence environ- not existed before. Rising energy prices have mentally beneficial technology development and affected supply and demand. Global energy use adoption. is expected to increase three-fold in the next 30 years; in the past 20 years, energy demand has Mr. Brenner explained that rising energy costs and doubled. Seventy percent of this new demand impending climate change impacts also are driving is coming from the less developed world, with the Agency to more aggressively investigate new China contributing nearly 30 percent of this new energy technologies that offer beneficial environ- demand. Another factor affecting clean tech- mental results. The VC community is closely nology growth is the amount of “main stream” attuned to emerging technology development so it financial capital being committed to this sector. Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 5
  9. 9. Every private-sector financial institution—from Council for Environmental Policy and Technology international banks to VC firms—is committing (NACEPT) or some other existing FACA commit- resources to clean technology. The key issue is to tee. put resources behind clean technology “winners” so that both investors and the environment will Based on the Summit agenda, Mr. Shapiro benefit. Mr. Habicht explained that a reason- explained that the “Desired Outcome” from each able goal for today’s meeting is for EPA and the session will be determined by EPA officials who VC community to gain a better understanding of will summarize the discussion from each session each other as well as a better appreciation of the and identify items for future consideration. He driving forces and constraints affecting each other. also mentioned that notice of the meeting was He hopes that this will form the foundation for published in the Federal Register and that there is establishing a process for ongoing communication. time set-aside on the agenda between the after- noon sessions for public comments. Mr. Habicht asked Mr. Shapiro to explain the ground rules for the Summit. Mr. Shapiro said Mr. Habicht suggested that the transition team that the Summit is not a Federal Advisory Com- for the new administration may be interested in mittee Act (FACA) meeting; however, it is a the results of today’s deliberations. Although the public meeting and there are some rules that Summit participants know many of the transition apply. The venture capitalists participating in the team officials, he emphasized that the focus of Summit cannot make recommendations to EPA the Summit should not be on providing advice nor can they reach consensus on group delibera- to the transition team; rather, the focus should tions. The meeting is designed to seek individual be on what communication mechanisms can be rather than group or collective advice. Mr. Shapiro established between government and VC officials cautioned that the group cannot reach agreements to develop a better clean technology policy. on issues and that participants should strive to direct their comments to EPA and not to each Mr. Habicht explained that the purpose of the other. In summary, Mr. Brenner explained that first two presentations is to establish a common the group can offer specific comments to the basis for both EPA and the VC community. The Agency but cannot offer recommendations to EPA first presentation by Emily Baker of the National that were derived through consensus voting. He Venture Capital Association (NVCA) will describe stressed that today’s meeting is an informal session the VC community, and the second presentation but mentioned that a more formal FACA process by Walt Kovalick will describe EPA. When intro- may follow. Mr. Brenner suggested that, in the ducing Ms. Baker, Mr. Habicht indicated that she future, EPA may consider forming a VC advisory is the director of the NVCA Clean Technology subcommittee as part of the National Advisory Advisory Council. Introduction to Venture Capital and Growth Emily Baker, National Venture Capital Association (Slide presentation is provided in Appendix C) Ms. Baker explained that the NVCA Clean included establishing a close relationship with the Technology Advisory Council was established U.S. Department of Energy (DOE) in its energy 2 years ago based on the growing interest and efficiency and renewable energy activities. Ms. Baker investment opportunity in this sector. Over the expressed her hope that the Summit would pro- past 18 months, NVCA has developed a clean vide an opportunity for the NVCA to establish technology public policy agenda and is currently better communications with EPA about clean lobbying Congress to recognize the significance technology issues. of this sector. Part of the NVCA efforts has 6 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  10. 10. Ms. Baker described the history and focus of the The investments focus on innovation and usually NVCA as a trade association. Initially, the NVCA are high risk and high reward. Forty percent of was created to foster communications among venture-backed companies fail, forty percent break VC professionals but the association has evolved even or make minimal gains, and only 20 percent into a public policy and advocacy organization make significant gains. In addition, VC builds for the VC community. The NVCA lobbies all value in companies and the economy. The invest- congressional committees including those deal- ment stays in the company and is used for growth ing with tax and trade policies, as well as energy, and venture capitalists bring operational and environment, and small business committees. scientific knowledge to bear to catalyze growth by VC firms are small businesses, so the NVCA is involving themselves in the day-to-day operations. proactive for small business. The NVCA sup- ports basic research because federal laboratory Although venture investments accounted for just developments—whether from the DOE National 0.02% of invested capital (about $230 billion Laboratories, EPA, or any other agency—can be a compared to the nearly $1.5 trillion invested by source of new product and technology ideas for hedge funds), companies that got their start with venture firms. VC accounted for 10.4 million jobs and $2.3 trillion of revenues in the United States in 2006, Ms. Baker noted that the research data collected which was 18% of the Gross Domestic Product. by the NVCA on venture investments is provided Some companies that were originally funded by in the MoneyTree Report. These data are shared VC include Genentech, Microsoft, Apple, Google, publicly and are available online. She commented FedEx, and Starbucks. Venture-backed companies that NVCA’s members are responsible for nearly usually outperform their non-venture counterparts 90 percent of the VC currently under manage- and current venture-backed companies account for ment. more than 400,000 U.S. jobs. Innovations funded by VC include the pacemaker, Herceptin (cancer), In defining VC, Ms. Baker provided an overview and Integrilin (heart disease). Venture capital- of the VC life cycle. The process starts with ists increasingly are focusing on clean technology VC funds being raised from various institutional (solar, wind, carbon capture, and energy efficiency). investors; once sufficient funds are collected, the The Global Insight Report prepared by the NVCA VC firms look for portfolio companies in which offers more details on the economic impact of VC. to make investments. VC firms screen hundreds and potentially thousands of companies annually Ms. Baker noted that venture capitalists are to identify 8 to 10 companies that will comprise welcomed by congressional members because their fund portfolio. they bring jobs and economic growth to their districts and states. For every VC dollar invested Both financial and management expertise is pro- in 1970-2001, there was $7.90 in U.S. revenue vided to portfolio companies by venture firms. during 2006. For every $28,463 of VC invested Ultimately, venture firms want to build a portfolio in 1970-2001, there was one job in the year 2006. company to the point where it can be a public The tangible benefits of venture investments are entity or be acquired by a larger entity. VC substantial and long term. firms do not invest in public markets or security derivates. They do not leverage or charge fees to Ms. Baker identified the top 10 states for VC portfolio companies; nor do these firms take hedge investment in 2007, noting that California, Mas- or short positions in companies. This is the major sachusetts, and Texas are the top three among the distinction between VC firms and hedge funds or states with more than $19 billion of VC invested. private equity investments. Beyond the top 10 states, there have been a lot of clean technology venture investments in Colorado Ms. Baker identified some of the characteristics of and New Mexico, probably because of the DOE VC investments. VC investments are long; some- National Laboratories in these states. California, times as long as 15 years in the life sciences sector. Texas, Washington, and Massachusetts lead the Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 7
  11. 11. top 10 states for VC-backed U.S. revenues in 2006. Ira Leighton asked Ms. Baker to identify the California, Texas, Pennsylvania, and Massachusetts top two most important factors that attract venture the list for VC-backed U.S. jobs in 2006, employing investments to certain states. Ms. Baker replied more than 4.8 million workers. Ms. Baker noted that the high concentration of university research that one in ten Americans works for a venture- in the top 10 states is one factor and another backed company. is the spin-outs of innovations from the DOE National Laboratories, particularly in states such In 2000, venture-backed U.S. revenues were as New Mexico. Historically, another factor that $1.5 trillion; they grew to $1.7 trillion in 2003 has encouraged venture investments is the close and then $2.3 trillion in 2006. The VC-backed proximity of portfolio companies to the VC firm’s growth rate of 11.8% from 2003-2006 outpaced offices. Most venture capitalists wanted to avoid the 6.5% of total U.S. sales growth. In 2000, there getting on a plane to visit their investment compa- were 8.7 million VC-backed U.S. jobs; this number nies. Ms. Baker admitted, however, that this factor grew to 9.4 million in 2003 and to 10.4 million is becoming less important, particularly with clean in 2005. The VC-backed U.S. job growth rate of tech investments. 3.6% outpaced the 1.7% job growth rate of the private sector from 2003-2006. Dr. Kovalick asked how cost center-based technology investments, like environmental Ms. Baker compared Internet-specific investments technologies, might differ from energy efficiency (dollars invested and number of deals) with clean investment technologies, like solar and wind tech investments from January 2005 to March farms that may save industry resources if they are 2008, indicating that there has been a much installed. Ms. Baker replied that solar and wind greater increase in clean tech investments since technologies are attracting investments because 2006. Ms. Baker provided data on the investment venture capitalists see a high market potential and activity in the top five industries—biotechnology, high return on their investments in these industry software, medical devices and equipment, industri- subsectors. Conversely, some venture investments al/energy, and semiconductors—from early 2007 to are made in environmental technologies because early 2008. There was an increase in investment investors believe they can “do well by doing good.” activity in medical devices and equipment and semiconductors in early 2008 compared to 2007. Eric McAfee explained his company’s venture The other industries experienced no increase in investments are not based on cost-center or incre- investment or a decrease in early 2008. mental revenue issues, but on the scalability of Ms. Baker identified six federal policy initiatives the business model. Venture capitalists tend to that are needed to drive clean tech: (1) Renew- be most interested in a rapidly growing revenue able Portfolio Standard, (2) Renewable Fuel stream from their portfolio investments. Gross Standard, (3) investment tax credits, (4) strength- profit margins are important to venture invest- ened CAFE standards, (5) more robust federal ments. Key questions include: What is the R&D for energy, and (6) the Federal Government potential revenue? What are the growth profit as an early adopter and user of clean energy margins? What will it cost to get there and how technologies. quickly can it be done? Rosemary Ripley added that EPA needs to think about how to show In closing, Ms. Baker stated that the NVCA is industry that it can make money on environmental looking forward to working more closely with technology investments. She offered that cap EPA to facilitate new partnerships. She provided and trade technology approaches may be a useful her e-mail address ( and encour- example; industry is interested in reducing carbon aged participants to contact her if they wanted dioxide in the atmosphere and if it can be demon- more information. Ms. Baker thanked the Sum- strated that industry could actually make money mit participants for the opportunity to make her using these technologies, then the market for them presentation and asked if there were any questions. would grow rapidly. 8 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  12. 12. In the early 1990s when the Clean Air Act Amend- than waste avoidance considerations in most clean ments (CAAA) were being negotiated, Mr. Brenner technology investments. He noted that, in the explained that EPA asked Smith Barney to conduct early 1990s, there were more than 60 publicly a study for the Agency on business opportunities traded, hazardous waste cleanup companies; today, in the proposed CAAA. Following completion of there are only four companies still in business and the study, EPA hosted a conference on the clean air two of those four are in Chapter 11 bankruptcy marketplace that sought to explain that the CAAA proceedings. Nevertheless, primary energy genera- could offer some significant investment opportuni- tion does create environmental problems, so the ties. Although the compliance technology costs key is to determine how to generate more energy associated with some provisions of the CAAA were but create fewer environmental problems. A good estimated to be very high, these Amendments did example of an industry where productivity has create some of the initial cap and trade programs increased while discharges have decreased is the endorsed by the Agency. chemical industry; during the past 10 years, the productivity of the chemical industry rose but its John Preston added that the potential profit center generation of hazardous materials decreased. for primary energy generation is much greater Introduction to How EPA Operates Walt Kovalick, Jr., Assistant Regional Administrator, Region 5, EPA (Slide presentation is provided in Appendix C) Dr. Kovalick explained that his presentation Policy Act (NEPA), which impacts many efforts would cover EPA’s mission and budget, provide a including some energy development projects. context for how EPA operates and implements its mission, and conclude with some of his personal EPA’s Fiscal Year (FY) 2008 budget was $7,472 observations about the nexus of EPA’s work and million. Since the passage of the 1995 Government environmental technology. Performance and Results Act, EPA like all federal agencies must prepare a 5-year strategic plan. EPA is one of more than 20 independent Currently, EPA is operating under the 2006-2011 regulatory agencies in the Federal Government. Strategic Plan (on the Web at Although EPA is not a Cabinet department, it has plan/2006/entire_report.pdf), which identifies five Cabinet status. The Agency’s mission is to protect goals: (1) Goal 1—Clean Air and Global Climate public health and the environment. There are Change, (2) Goal 2—Clean and Safe Water, (3) more than 20 statutes that provide mandates for Goal 3—Land Preservation and Restoration, (4) the Agency, including: Clean Water Act (CWA); Goal 4—Healthy Communities and Ecosystems, Clean Air Act (CAA); Safe Drinking Water Act and (5) Goal 5—Compliance and Environmental (SDWA); Resource Conservation and Recovery Act Stewardship. Goal 1 accounts for 13.1% of EPA’s (RCRA); Comprehensive Environmental Response, Compensation, and Liability Act (Superfund); budget and 2,609 full-time equivalents (FTEs). Federal Insecticide, Fungicide, and Rodenticide Act Goal 2 accounts for the largest portion of the (FIFRA); Toxic Substances Control Act (TSCA); EPA budget, 36.1% and 2,901 FTEs; most of the and others. Beyond environmental media like air, resources associated with this goal are distributed water, and land, EPA also has regulatory respon- to states for their local water responsibilities. Goal sibility for regulating products under FIFRA and 3 accounts for 23.6% of the budget and 4,574 TSCA. Under TSCA, for example, EPA regulates FTEs, Goal 4 for 16.7% of the budget and 3,736 existing and new chemicals. Another statute that FTEs, and Goal 5 for 10.5% of the budget and was not on the slide is the National Environmental 3,487 FTEs. Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 9
  13. 13. EPA’s $7,472 million budget is divided among sources are under control in the United States so state and tribal assistance grants ($1,222 million), the focus has turned increasingly toward diverse operations from non-Trust Funds ($3,175 million), nonpoint sources of pollution, such as agricultural operations from Trust Funds ($1,360 million) runoff and salt runoff from highways and other and infrastructure/State and Tribal Grant project sources. For the past 15 years, EPA headquarters financing ($1,715 million). has been working with the regions on compliance assistance, voluntary partnerships, Performance Dr. Kovalick presented EPA’s organization chart, Track (beyond compliance), and partnering for which identified the Agency’s headquarters and economic gain/development (e.g., Brownfields). regional offices. The chart explains how EPA is EPA currently has more than 50 voluntary organized by environmental media and function. partnership programs to help businesses and the Dr. Kovalick noted that each EPA region is orga- public with environmental protection and more nized similar to EPA headquarters with media and than 500 companies involved in Performance functional offices. Track, which is a voluntary beyond compliance recognition program. EPA also executes more Dr. Kovalick explained that the regulated com- than 100 cooperative research and development munity is any business or organization that is agreements (CRADAs) with private sector organi- required to comply with EPA statutory or regula- zations annually. tory requirements. This community includes more than 800,000 permitted facilities under CAA, Dr. Kovalick presented a map that depicted the CWA, and RCRA; more than 20 million small 10 EPA regions and the states in each region. businesses; 80,000 units of local government; and He mentioned that these regions are consistent millions of regulated facilities under more than 12 among federal agencies. Almost one-half of major environmental statutes. Dr. Kovalick pointed EPA’s 17,000-member workforce is located in the out that most permitted and regulated businesses regional offices because nearly all environmental are regulated by the states, not EPA. For most programs are deleted to the states and tribes. statutes, EPA sets national standards and the states The vast majority of inspection, permitting, and implement them on a local basis. State and local enforcement is at the state/tribal level. The governments provide most of the environmental Agency has approximately 2,400 FTEs dedicated regulation; these agencies issue most of the per- to science and technology work and most of these mits and conduct most of the enforcement cases. staff members are in the Office of Research and Development (ORD). Dr. Kovalick noted that With respect to operations and implementation, more than a third of the entire EPA workforce is Dr. Kovalick explained that EPA exercises dis- scientists and engineers. About $440 million of cretion in balancing the mandate given in each the Agency’s $760 million science and technology statute. The different types of traditional regula- budget is extramural. From a technology tion used by EPA include technology based (most perspective, Dr. Kovalick explained that states do stringent or cost effective), health based (set for not routinely accept the same technologies for environmental conditions), market based (sets control and compliance; therefore, a technology limit for nation/area; facilities get tradable allow- that might satisfy environmental requirements ances), and use restrictions (exposure restricted in California might not be acceptable in New by label directions or product restriction). The York. Reciprocity among states on environmental market-based, cap and trade allowances are avail- technologies for permitting and enforcement able primarily in the Clean Air regulations, and remains an elusive issue. EPA use restrictions are available only through the FIFRA and TSCA regulations. Dr. Kovalick identified six EPA roles in the envi- ronmental technology marketplace, including: In the 1990s, EPA began to move beyond “com- (1) funding agent, (2) technology developer, mand and control” approaches to environmental (3) regulator/enforcer, (4) information broker, protection. In general, large stationary and point (5) partner in deployment, and (6) user of “first 10 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  14. 14. resort.” Dr. Kovalick went on to explain that EPA is Available Control Technology (BACT) and other best as a regulator/enforcer and as a verification agent levels. In addition, EPA has an appreciation of (part of the information broker role). The Agency technology aspects of many sectors through part- is less experienced as a funding agent, technology nering programs such as Design for Environment, developer, or user of “first resort.” As verification energy conservation, and others. agent, EPA has conducted a very aggressive program with more than 400 technologies verified through Dr. Kovalick stated that, with few exceptions, the Agency’s Environmental Technology Verification EPA’s mission is not to be a technology develop- (ETV) Program in the past 15 years. ment organization. New environmental problems are viewed first through a statutory/regulatory lens Dr. Kovalick presented a diagram that mapped leading to technology inquiry. A recent example EPA’s environmental technology programs to the of this is the use of the Underground Injection R&D continuum (from research/proof of concept Control (UIC) Program’s proposal to sequester to diffusion/utilization). He explained that the greenhouse gases; the technology did not drive the majority of EPA’s efforts are concentrated in diffu- inquiry, it was driven by the statutory requirement. sion/utilization. (Each of the programs identified Although EPA has expertise in some niches, the in the diagram were fully explained in the hand- Agency’s mandates do not call for comprehensive out that accompanied Dr. Kovalick’s presentation.) monitoring of technology developments. Dr. Kovalick He noted that the EPA technology programs also mentioned the Environmental Technology directed at earlier stages along the continuum are Council (ETC), which is a forum established by small compared with those of other federal agen- EPA for joint action across program and regions. cies; for example, EPA’s Small Business Innovation More information on the ETC is available on the Research (SBIR) Program is approximately $6 Internet at million annually, whereas DOE’s SBIR Program is about $500 million annually. In closing his presentation, Dr. Kovalick offered some observations about EPA’s role in environ- Dr. Kovalick identified a number of intersections mental technology development. Every 6 months, between EPA’s work and environmental technolo- EPA publishes a regulatory agenda that charts the gies. For example, EPA’s researchers and program subjects and issues to be addressed over a several staff have an in depth understanding of technology year period. This agenda does not provide details in certain niche areas, such as drinking water treat- about levels of the proposed regulations; this ment, air pollution control, remediation, and diesel information will become available as regulations retrofit. He described a recent example wherein are formally proposed in the future. Dr. Kovalick Congress directed that EPA determine the best pointed out that, by their nature, technology- technology available for removing arsenic from driven regulations “fix” best technology and drinking water for small communities. Likewise, because of limited resources, the Agency is unable EPA has expertise in monitoring and measure- to continuously update the best technology ment technologies because the Agency specifies identified in regulations. EPA is well vested in the methods to be used to track environmental technology diffusion activities, especially technol- performance for wastewater discharges or air pol- ogy verification. The Agency is experienced in lution emissions. EPA also has a secondary level operating SBIR and grant programs but has no of understanding of industrial processes to set Best mandates for many other financial vehicles. Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 11
  15. 15. Discussion of the Venture Capital Report Recommendations, Especially Related to Beginning and Sustaining Communications Mr. Brenner suggested that questions for both the facility is expected to produce natural gas at Dr. Kovalick and Ms. Baker can be posed as part less than half the cost of other current gasification of the discussion of the second NACEPT Report technologies. There will be zero carbon dioxide recommendation to “forge and sustain communica- (CO2) emissions from the facility because the tions with the early-stage investment community.” CO2 generated will be delivered under pressure to He said that former EPA Administrator Bill Reilly enhance oil recovery in the Gulf area. and former EPA Deputy Administrator Hank Habicht will be remembered for encouraging EPA Third, the U.S. Federal Government should consider officials to “get out more” and interact with states, how to reduce its carbon footprint. Mr. Preston environmentalists, and the business community. explained that C Change Investments is the Several successful new EPA programs such as co-developer of a first-of-a-kind ecologically Performance Track and other partnership programs sustainable Medical Science Green City to be grew out of these efforts. Mr. Brenner explained located within Sejong, which is to become the that the NACEPT recommendation to forge com- new administrative capital of Korea. The $200 munications with the venture capital community million project is part of a large effort to build offers a similar opportunity for the Agency. There a highly efficient, near-zero carbon emission were several specific suggestions for the Agency new capital where Korea’s national government to consider within this recommendation and he office buildings will be relocated. Globally, encouraged Summit participants to keep these office buildings consume nearly 40 percent of specific suggestions in mind during this discussion. energy requirements and simple innovations like high efficiency compact fluorescent light (CFL) Mr. Preston complimented Dr. Kovalick and Ms. bulbs or improved insulation materials can make Baker on their presentations. He offered four a significant difference. He suggested that the observations. First, in clean technology develop- payback for converting to CFL or higher efficient ment, private-sector resources greatly exceed bulbs in U.S. government office buildings could be federal government resources. The clean technol- 3 years or less. If the Federal Government tried to ogy investments being made by the California develop an even more efficient and less expensive Public Employees’ Retirement System (CalPERS) CFL bulb than currently available, the potential is an example of the vast resources available in the impact of such a small yet important lighting private sector. Three years ago, CalPERS had no device would be enormous. He stressed that the resources invested in energy and environmental Federal Government adoption of such small, but technologies; today, more than 50 percent of its innovative technologies could establish a significant resources are invested in these technologies. precedence and have a major market impact. Second, there is a pending revolution in innova- Mr. Preston suggested that the Federal Govern- tion in energy and environmental technologies. ment consider creating “shoot-offs” to spur The dramatic escalation of oil prices in the past 2 innovative technology development. In 1993, years is the principal cause for this revolution. An the Federal Communications Commission (FCC) example of this revolution is today’s announce- sponsored a shoot-off for the design of the high ment by C Change Investments (the venture definition television (HDTV). The FCC was capital firm founded by Mr. Preston and former unable to decide among the four leading designs; CalPERS executive Russell Read) to construct the so they contacted the Massachusetts Institute of world’s largest, most-efficient synthetic natural gas Technology (MIT) to identify the best design production facility. Because of its high efficiency, features among each of the four finalist systems operational availability, and production capacity, and those features were used as the specifications 12 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  16. 16. for HDTV. EPA could emulate this approach believes that EPA could signal the establishment to identify the best light bulb or best insulation of a huge greenhouse gas reduction market if a technology for retrofits in buildings. Mr. Preston national cap and trade system for these gases commented that the U.S. construction industry was established. Beyond the VC community, is the one of the few sectors that has failed to Mr. McAfee noted that large utilities, such as innovate or improve productivity over the past Duke Energy, one of the largest U.S. electric 50 years. If EPA could push the development of power companies, also would be interested in some construction-related technologies and the technology investment opportunities created by a Federal Government was as an early adopter of cap and trade system. these technologies, the results could be significant. This approach would encourage the VC commu- Mr. Habicht added that large companies such as nity to invest in these technologies, which would Duke Energy make up the primary membership also offer a short economic payback in energy of EPA voluntary programs, such as Performance savings for the Federal Government. Track, Climate Leaders, and others. These large companies are the clean technology buyers for Mr. Habicht noted that EPA teamed with utili- many VC portfolio companies. Mr. Preston agreed ties and other organizations in the early 1990s to about the value added provided by large compa- sponsor the development of advanced residential nies and noted that utilities are providing one-half technologies, such as the Super Efficient Refrig- of the capital requirements for the $3.5 billion erator. These programs were referred to as the coal gasification project he mentioned earlier. “Golden Carrot” programs because they were market-pull partnerships to demonstrate federal Ms. Ripley agreed that CO2 emissions reduction leadership in promoting technology advances. will create a big market and she believes the With very modest resources, EPA and its partners world is waiting for the United States to show leveraged a much larger private-sector investment leadership on this issue. The new Administration in energy efficiency and pollution prevention. should step up and make some decisions about how the United States can address the problem; Mr. McAfee suggested that the Federal Govern- then, the VC community can determine the big- ment could make it easy for VCs to fund the gest opportunities. She suggested that there may technology advances if the government could help be opportunities to use existing emission control the VCs know where to look for such advances. systems to control CO2 as well. For example, one Venture capitalists need insights on markets. He of the NGEN portfolio companies, Powerspan stressed that the venture community spends a lot Corporation, offers one of the least expensive of time trying to determine the biggest market means of capturing CO2 for sequestration. As a with the highest margins; anything the Federal post-combustion technology, its development grew Government can do to identify those markets and out of another proprietary Powerspan technology margins would be of great interest to the that offers cost-effective, multi-pollutant (sulfur VC community. dioxide and particular matter) control of coal-fired power plant emissions. Mr. McAfee said he is a big fan of setting targets and then letting the market determine how to Mr. Brenner noted that Frank Alix, Chairman get there. One of the Cagan McAfee portfolio and Chief Executive Officer of Powerspan, has companies, for example, has developed algae that visited EPA and discussed the company’s pioneer- consumes CO2 and produces ethanol; the demand ing cost-effective technologies for controlling coal for such a technology might be significant if cap combustion emissions. The interaction the Agency and trade programs were established for green- has had with Powerspan has been valuable in house gas emissions. This type of technology also terms of understanding clean energy technologies. should be of interest to EPA because it addresses Mr. Brenner said that these types of interactions two environmental issues—the elimination of need to be become more common across the CO2 and the production of biofuel. Mr. McAfee Agency. Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 13
  17. 17. Ms. Ripley supported the earlier proposal for Mike Shapiro commented that the “monthly creating government-sponsored competitions and obligation to report” for water discharge permitted suggested one for CO2 reduction technologies. facilities is based on the amount of data EPA can Such competitions would force the Agency into receive (and review) as well as the data a permit- dialogues with companies that are developing ted facility can generate. If data are generated advanced technologies. instantaneously the same violation problems also may apply so citizen suits could continue and Larry Starfield asked if the venture capitalists may even grow. Further, if real-time monitoring were aware of some of the regional environmental was adopted by permitted facilities then regula- problems being addressed by the Agency, such as tions may need to change to react to the type and environmental issues associated with concentrated amount of data reported. animal feed lot operations (CAFOs). He pointed out that CAFOs are a large environmental prob- Outside of water discharge monitoring, Mr. Starfield lem created by dairies, poultry operations, and pointed out that remote sensing cameras have cattle farms. Some states, like North Carolina been used in the Houston, Texas, area to monitor and Arkansas, have supported the development air emissions from petroleum refineries. There is of animal waste digesters but all of these systems an economic incentive for refineries to identify have to be subsidized because they are not cost and reduce their air emissions because volatilized effective. Mr. Starfield explained that there is a emissions means they are losing product out of huge market for technologies that would remove their stacks. Currently, EPA does not use these animal waste problems from the watershed and cameras for emission monitoring and enforcement, require no government subsidy. but the industry has adopted their use for eco- nomic reasons. As stated by Dr. Kovalick earlier, there are nearly 800,000 permitted facilities in the United States Mr. Preston suggested the CAFOs problem may and each of these facilities must provide monthly be addressed by looking at the issues associated reports on permitted operations. The monthly with the conversion of biomass to energy. The reporting requirement has created a huge market energy density of the animal waste needs to be for lawyers when citizens file suits every time the understood because transportation costs may be permitted limits are exceeded. Mr. Starfield noted significant for moving the waste from the field that real-time monitors would prevent the occa- to the digester. The energy density of petroleum sions for these suits because permitted facilities coke and coal is about 14,000 BTU per pound, could be warned when the limits were exceeded while the energy density of animal waste may be (for various discharge points) and take corrective about 5,000 BTU per pound; thus, the transporta- action immediately. Self-reported violations by tion costs for petroleum coke and coal is three companies would prevent citizen suits and reduce times less than that for animal waste. Likewise, EPA enforcement costs tremendously. corn can produce 200 gallons of biofuel per acre per year, palm oil can produce 500 gallons Daniel Hullah replied that real-time monitoring per acre per year, and algae can produce 20,000 technology probably exists but the reason it has gallons per acre per year. Unfortunately, many not been adapted for use by the permitted facili- investors mistakenly invested in corn because of ties is because its other application probably has the government subsidy and neglected to consider a larger market. Mr. Hullah also noted that the the economic capability of the technology. In businesses may be reticent to adopt technologies retrospect, it would have been more beneficial if that would increase their cost by taking more the government would have offered a subsidy for frequent corrective actions. It may be capital “green fuel” independent of the conversion tech- intensive to establish the market for such tech- nology. nologies. 14 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  18. 18. For addressing animal waste, Mr. Preston suggested initiate a dialogue on the issues. Mr. Preston that small anaerobic digesters may be the solution. said that “necessity is the mother of invention” He noted that new $1 billion Bank of America and suggested that rolling reductions with non- Tower in Manhattan (New York City) will have a performance consequences may be an alternative small anaerobic digester in the basement to treat approach. EPA may want to consider a tax on all of the waste generated in the building. Initially, nitrogen runoff in water or CO2 emissions that Bank of America estimated a 5 to 7 year payback would become effective at some time in the on their investment; but recently revised its esti- future and businesses and/or manufacturers would mate to a 3 year payback on water, waste, and be taxed if they did not reach those discharge energy operations and maintenance. Mr. Shapiro or emission levels. The cap and trade system mentioned that the nitrogen and phosphorous for reducing air emissions works; with such as associated with animal waste are not normally approach, utilities would be charged with reducing addressed with methane generation technologies. CO2 emissions by “x” amount over so many years. Both the nutrient and pathogen issues need to be Utilities would make investments to reach these addressed with these technologies. reduction levels and the levels could be changed (lowered) periodically. Mr. Preston suggested that Mr. McAfee explained that venture capitalists love this is the approach the Agency has taken with to hear about problems; the bigger the problem, the diesel engine emission reductions. the more appealing it is to the VC community. If distributed anaerobic digesters are the solution for For nitrogen runoff, fertilizer manufacturers could animal waste but cost is an issue, maybe a loan be contacted about similar requirements to reduce guarantee program for dairy, poultry, and other the runoff into rivers and streams. These manu- farms may be the solution. He would like to facturers would make investments to determine have input from EPA and other federal agencies how to bind the nitrogen to reduce releases or concerning the size of the carbon sequestration pay for their inability to do so. These approaches problem. He commented that legislating seques- would not only create an investment opportunity tration may not be wise, similar to the corn/ for venture capitalists but for the entire private biofuel subsidy. If the goal is energy independence sector because everyone clearly knows that in “x” or cleaner air, then those issues should be legis- years it will be worth “$y” to eliminate this prob- lated rather than the feedstock. lem. Ira Leighton stated that, in his experience, envi- Mr. Brenner commented that EPA conducted a ronmental requirements are based on ambient not case study to determine why the Agency’s experi- technology standards. A new National Pollutant ence with the diesel rules worked so well. It Discharge Elimination System (NPDES) permit turned out that this effort was a good example will be water-quality driven and an opportunity of how effective cooperative processes can be; it exists because existing technology will not be included “shuttle diplomacy.” EPA talked with capable of achieving the new standard. This will diesel engine manufacturers and pollution control create a strong driver for emerging technology. equipment manufacturers to determine what was Unfortunately, it is very challenging for EPA to feasible and how hard the Agency could push issue a performance-based standard. It is difficult without creating impossible regulatory require- to establish the performance criteria because ments. the regulated businesses and developers are not forthcoming about the capability of emerging Based on EPA’s experience to date with coop- technologies. How can the VC community assist erative discussions on more stringent regulatory EPA in writing performance-driven requirements? requirements, Mr. Brenner suggested that EPA could identify “grand challenges” (e.g., CO2 reduc- Ms. Ripley suggested that EPA may want to tions or animal waste reductions) in the Agency’s consider publishing a Request for Proposals on Strategic Plan. These grand challenges could be performance standards for specific pollutants to supplemented with specific problems such as Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 15
  19. 19. lowering fine particulate emission requirements, problems such as animal waste control may offer expanding diesel retrofit applications, expanding an opportunity for financial assistance programs wood stove emission reductions, or addressing the such as grants or cooperative agreements to find pipeline problems associated with ethanol delivery. solutions without regulations. Publication of these grand challenges and specific problems could be followed by EPA-sponsored Second, mechanisms need to be created to conferences with venture capitalists and others determine how performance standards can be about how to deal with these problems. These developed without alienating the regulated conferences could build on the type of interactions industry. Mr. Habicht noted that, in the past, the begun with this Summit and help create an under- Hazardous Waste Treatment Council tried to sug- standing on both sides about the issues associated gest how the hazardous waste treatment standards with these challenges and problems. should be lowered and the regulated industry was offended by this action because it was not part of Mr. McAfee suggested that scalability is one of the the dialogue. Venture capitalists do not want to most important issues to consider. How scalable be viewed as encouraging more stringent require- are conferences, Web sites, list serves, and other ments that may not be acceptable to the regulated tools of the trade for use in communicating as industry; these companies would be customers for much information as possible about these chal- these emerging technologies and need to be part lenges and problems to the VC community and of the dialogue about challenges and problems. others? There are only a few venture capitalists involved in this Summit but there are 470 NVCA Third, publicizing grand challenges to be addressed members and thousands of firms involved in by non-regulatory solutions, such as the Golden private equity. The issue is how can EPA maintain Carrot Super Efficient Refrigerator challenge, the communications with all of these entities and lead phase-down, the chlorofluorocarbon (CFC) inform them about these challenges and problems. phase out, and others, is an attractive suggestion. Ms. Baker noted that NVCA would welcome the Beyond identifying these challenges and prob- opportunity to serve as an avenue for communica- lems, Mr. Habicht suggested that EPA could be tions with the VC community. the source of needed information on unintended consequences, life-cycle impacts, and other issues Mr. Habicht offered three comments to capture that would be useful in determining how to solve the morning’s discussion. First, pre-regulatory some of these challenges and problems. Working Lunch – Overview of the New Department of Energy Technology Commercialization Programs Drew Bond, Office of Energy Efficiency and Renewable Energy, DOE (Slide presentation is provided in Appendix C) Mr. Bond thanked EPA and the VC community commercialization programs. In addition, Mr. Bond for the opportunity to make a presentation about explained there are a number of congressional bills DOE’s technology commercialization efforts. In that will benefit energy efficiency and renewable the Federal Government, both legislative authority energy technologies. He commended EPA for and political/management support are important organizing the Summit and hoped that it might in creating new initiatives. He noted that DOE lead to more and improved cooperation between Secretary Sam Bodman and Andy Karsner, former EPA and DOE. DOE Assistant Secretary for Energy Efficiency and Renewable Energy, were the inspiration and National security, environmental, and economic supporters for many of the new DOE technology goals form the basis of a robust National Energy 16 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  20. 20. Policy but historical data demonstrate the mag- Laboratories are government owned but contrac- nitude and urgency of the challenge. Mr. Bond tor operated. For the new NREL contract that pointed out that the United States continues to was announced in October 2008, a cooperative use non-U.S. sources for its energy supply and arrangement was established whereby the two much of this supply is fossil fuel based. All of principal contractors—Midwest Research Institute these trends are in the wrong direction. Energy and Battelle Memorial Institute—established part- security requires that the United States diversify nerships with three universities—Stanford, Ohio its energy mix and reduce its dependence on State, and MIT—and the financial community to petroleum. Environmental stewardship requires an help NREL accelerate the future commercializa- energy policy that reduces greenhouse gas emis- tion and widespread adoption of sustainable sions and other negative environmental impacts. energy technologies. Economic competitiveness requires the creation of a more flexible, more reliable, higher capacity U.S. Mr. Bond stated that DOE Program Managers energy infrastructure and improvement of energy have indicated that the “commercialization valley productivity. of death” has prevented DOE program from being as effective as the mangers would have liked. The In describing DOE’s organizational structure, “commercialization valley of death” refers to the Mr. Bond stated that DOE has three principal quantitative challenge of transitioning between department organizational units—Office of Energy early adopters and mass market penetration. This (energy R&D); Office of Science (basic science valley occurs after technology creation in the research); and National Nuclear Security Admin- market-focused business and product develop- istration (nuclear security). The Office of Energy, ment stage. The typical investors at this stage are which includes the Office of Energy Efficiency entrepreneurial and seed/angel investors. and Renewable Energy (EERE), focuses on applied research issues, trying to move projects from basic Mr. Bond explained that a technological innova- research to the field. tion must overcome four challenging transitions before reaching the market. The first transition is EERE’s budget was $1,344 million in FY 2008. from basic science to applied science. The second EERE develops a broad range of clean energy is from applied science to technology investors. technologies, including fuels and vehicles (vehicles, The third transition is from technology investors hydrogen, biomass), renewable power (solar, wind to asset investors, and the fourth is from asset and water, geothermal), and energy efficiency investors to markets. The EERE Commercializa- (buildings, industrial). EERE also is responsible for tion Team focuses on building bridges between the Weatherization Intergovernmental Program the applied scientists and technology investors, (WIP), which works with states on low-income which is the second of the four transitions. Mr. housing retrofit activities and the Federal Energy Bond commented that DOE also is interested in Management Program (FEMP), which works the issues facing developers at transitions 3 and with counterpart federal agencies on the procure- 4 but these deal with tax and regulatory policies. ment, use, and management of more efficient He noted that public benefit is only fully realized energy resources. Nearly one-half ($622 million) when the product is delivered to the market. of EERE’s budget is devoted to development of vehicles and fuels. EERE’s commercialization bridges are designed to overcome four primary gaps: talent, information, EERE spreads the federal R&D funding across capital, and strategy. The “talent bridge” involves multiple laboratories but works predominantly DOE attracting and hiring personnel that have with the National Renewable Energy Labora- both technical and business skills because both tory (NREL). Eleven of the 17 DOE National skill sets are required to commercialize technolo- Laboratories are supported by EERE, but NREL gies. The “information bridge” seeks to build in Golden, Colorado, receives nearly 95 percent of effective communications between DOE staff and its annual funding from EERE. The DOE National technology investors. Mr. Bond noted that techni- Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 17
  21. 21. cal language fails to resonate with the business Kleiner and Perkins was selected for the EIR community. The “capital bridge” is the recognition position at NREL, Foundation Capital for the EIR that the Federal Government can play a key role position at Sandia, and Arch Ventures (formerly in early stage seed funding. The Federal Govern- spun out from the Argonne National Laboratory) ment may have a higher “risk tolerance” than even for the EIR position at Oak Ridge. Mr. Bond angel investors on technology development issues. expects that the EIR Program will cause a cultural VCs are more likely to fund business plans and change within each of the three participating prototypes than research papers and competi- National Laboratories as well as across the Depart- tion for VC funding is stiff. The “strategy bridge” ment toward recognition of the value applied tries to cultivate and promote policies that would research can offer for technology commercializa- impact the development of all EERE technologies. tion. Best practices have been developed to foster a culture of innovative. The Equity Share License Agreement, which is tailored for entrepreneurs and small businesses Built off of a proven VC model, the Entrepreneur with tight budgets, forms a primary plank in in Residence (EIR) Program forms the primary the “strategy bridge.” Traditionally, the DOE plank of EERE’s “talent bridge.” This is a well National Laboratories required an up-front large known model that has been used in the VC com- cash payment in licensing fees, making traditional munity to develop knowledgeable investors and licensing agreements expensive and time consum- company managers. A fundable business needs a ing to negotiate. Small entrepreneurial companies technology that works and a market ripe to sell often are more willing to give up equity rather into, but most importantly it needs an entrepre- than offer cash to license emerging technolo- neur who can build the business plan, assemble gies. Built off the Stanford University license, a management team, and raise capital. VCs favor the Equity Share License has been pre-negotiated experienced entrepreneurs with a track record of with VC general counsels, National Laboratory identifying promising technologies and building general counsels, and DOE general counsel. DOE markets. adopted the Equity Share License Agreement as a replacement for traditional licenses to attract more DOE’s EIR Program connects leading scien- entrepreneurial interest in National Laboratory- tific and business talent. Through a competitive developed technologies. solicitation process, three DOE National Laborato- ries—NREL, Sandia, and Oak Ridge—established Designed to introduce investors to technology the pilot EIR Program. The National Laboratories opportunities, the Technology Commercialization partner with a VC firm to sponsor the EIR. The Showcase forms the primary plank of the “infor- VC firm identifies, hires, and mentors the EIR mation bridge.” Many EERE funded technologies who is placed in the National Laboratory. The stall in the “commercialization valley of death” EIR mines the laboratory intellectual property and simply because the innovation has not been clearly drafts business plans for the commercialization of communicated to the business community. DOE technologies developed by the National Labora- challenged the EERE Program Managers to iden- tory. Some of the key criteria DOE used to select tify 8 to 10 of the most promising technologies the VC firms included their size and track record in their portfolios. DOE created simple, layman’s (in the clean technology sector) with commercial- descriptions of the innovation opportunities, izing portfolio company technologies, and their and then invited prominent investors to a 2-day experience with EIRs. EERE provided $100,000 conference showcasing the technologies. EERE matching-funds and full access to the respective started these Commercialization Showcases in National Laboratory. The program also includes a 2007. Twenty-four venture capitalists participated pre-negotiated standard equity share license agree- that first year and the number increased to 80 ment. venture capitalists in 2008. 18 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  22. 22. To illustrate how the technologies are described intellectual property portfolios. Resources for in simple layman’s terms, Mr. Bond described the these funds was established through Section 1001 case study of low-cost carbon fiber technology of the 2005 Energy Policy Act, wherein DOE was as a lightweight replacement for structural steel. tasked with setting aside 0.9 percent of its annual The problem is that carbon fiber currently is too budget for applied research to be used to provide expensive for broad application ($12-30/lb vs. matching funds with private partners to promote $5-8/lb). The Oak Ridge National Laboratory promising energy technologies for commercial has developed technologies to reduce the cost purposes. of carbon fiber production by utilizing low cost feedstocks (low-cost textiles and renewable lignin) The EERE Commercialization Team pursues an and advance processing methods (thermo-chemical aggressive schedule to accelerate the deployment stabilization, rapid oxidation, and microwave- of advanced energy technologies. Mr. Bonds assisted plasma carbonization). Low-cost carbon presented a timeline that identified the many fiber reduces vehicle mass by up to 40 percent, activities undertaken by EERE to support each of which increases fuel economy up to 25 percent. the four bridges described earlier. For the “talent Three patents have been issued on the technology bridge” the activities included EIRs working in and five patents and seven invention disclosures the laboratories, Senior Executive Service (SES) have been filed. Advisors on board, Summer Associates at DOE, and Commercialization Fellows at NREL. Mr. Bond Four of the processes have been reduced to explained that the SES advisors are 3-year SES practice (microwave-assisted plasma carboniza- appointments that were created to bring into tion, textile-based precursors, thermo-chemical DOE business and finance executives to help stabilization, and plasma oxidation). The time to EERE with its technology commercialization availability is 3 to 5 years, and the capital needs efforts. Mr. Bond stated that he holds one of the include a 2-4 MM lb/year carbon fiber plant that three current appointments in these positions. is expected to cost $18-22 million. The Summer Associates at DOE are second-year Stanford University students seeking a Master The Technology Commercialization Fund, designed of Business Administration (MBA) degree who to fill the gap between R&D and VC funding, work at DOE as interns on various energy-related forms the primary plank for the “capital bridge.” projects. EERE expects to reach out to Ohio Because innovations struggle to find financing fol- State University and MIT MBA Programs in the lowing completion of the research and prior to VC future for interns, given their partnership with funding, the Technology Commercialization Fund NREL. The Commercialization Fellows at NREL offers financing for National Laboratory technolo- are business-minded individuals (up to three gies that are not yet proven at the bench scale. business persons annually) selected to help NREL The Fund requires 50-50 DOE-industry matched push intellectual property development at the funds. The funds are restricted to prototype devel- laboratory. opment, demonstration, and deployment, and they cannot be used for further scientific research. The In addition to its efforts to facilitate the second Fund is designed to complement angel investment transition from applied science and technology or early stage corporate product development. investors, the EERE Commercialization Team advises many of DOE’s public-private initiatives Eight of the 13 National Laboratories received that address the subsequent transitions. Mr. Bond financing from the Technology Commercializa- described a few examples. In January 2008, tion Fund in 2008. The funding decisions are EERE signed an agreement with the Governor of based on the potential for market opportunity, the Hawaii creating the Hawaii Clean Energy Partner- likelihood of commercial success, the management ship. This bipartisan agreement was created to team, DOE priorities, and private-sector partners. help Hawaii implement its Renewable Portfolio The Fund is a “carrot” to attract private-sector Standard (RPS). The Hawaii RPS is to reach 20 partners to examine the National Laboratories’ percent use of eligible energy efficient and renew- Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 19
  23. 23. able energy technologies by 2020. Hawaii has expressed an interest in loan guarantees are large one of the highest electricity rates in the United (e.g., $100 million revenues); DOE is interested States—27 cents a kilowatt hour in Oahu and 49 in attracting smaller companies (e.g., $25 million cents a kilowatt hour in Kauai. Ninety-five per- revenues or less) for loan guarantees as well. cent of Hawaii’s energy is from oil and 99 percent comes from non-U.S. sources. The goal for the DOE will be establishing a Finance and Invest- Partnership Program is for Hawaii to achieve 70 ment federal advisory committee to assist the percent of its energy from renewable sources by Department with its Loan Guarantee Program 2030. and other technology commercialization and deployment efforts. According to Mr. Bond, the The DOE Loan Guarantee Program was created establishment of this federal advisory committee as a result of the Energy Policy Act of 2005. was mandated either by the Energy Policy Act of DOE received appropriations (up to $4 billion) 2005 or the America COMPETES Act. to offer loan guarantees in 2006. More than 140 companies responded to the initial DOE loan In closing his presentation, Mr. Bond provided guarantee solicitation, and in 2007, 16 companies e-mail addresses for the SES Advisors of the EERE were selected from the solicitation and asked to Commercialization Team, which in addition to submit full proposals. In 2008, DOE received himself includes Carol Battershell and Wendolyn up to $38.5 billion in additional loan guarantee Holland. Mr. Bond thanked everyone for their appropriations. These additional appropriations attention and asked if there were any questions. were provided for nuclear energy, fossil energy, and energy efficiency and renewable energy technology Mr. Preston complimented Mr. Bond on his pre- development; $10 billion was slated for energy sentation but expressed his concern that DOE had efficiency and renewable energy technologies. yet to issue a single loan guarantee. He cautioned The current solicitation for energy efficiency and that failure to move quickly is the “kiss of death” renewable energy technologies has been extended for developers and investors. Mr. Preston said he from December 31, 2008 to February 26, 2009. helped developed the “fast track” option for the This solicitation focuses on three issues: (1) building Department of Defense’s (DOD) SBIR Program a better “widget” (e.g., an advanced technology); and he would be glad to offer suggestions from (2) building the widget domestically (e.g., manu- this experience to DOE. Mr. Bond responded that facturing capabilities in the United States); and David Frantz, Director of the DOE Loan Guar- (3) putting together the widgets in a way that antee Program, is seeking advice and would be they have not been put together before. Regard- interested in hearing any suggestions to improve ing this third issue, Mr. Bond explained that DOE his program. is interested in proposals that offer the integrated deployment of energy efficiency and renewable Ms. Ripley asked if the Loan Guarantee Program energy technologies. The issue of concern is how would make loans to small companies that are to deploy technologies that are scalable? How can pre-revenue or if the Program was directed only wind energy, for example, be matched with energy to post-revenue companies. Mr. Bond replied that storage (e.g., battery operated vehicles)? the Loan Guarantee Program favors companies that are post-revenue. The Program has to be self- Mr. Bond cautioned that DOE and other federal sustaining and there has to be a high probability agencies cannot operate at the speed of business. of repayment of the loans. In addition, there are This is clearly seen in implementation of the DOE four substantial fees associated with the Program Loan Guarantee Program, which is 3 years old and that make it more favorable for post-revenue DOE has not yet issued the first loan guarantee. companies. The application fee alone ranges from DOE is thinking about ways to make the Loan $75,000 to $125,000, depending on the size of Guarantee Program more “small business friendly.” the project. The credit subsidy fee also is sub- Most energy efficiency and renewable energy stantial. This fee is the government’s estimate of technology development companies that have the risk level associated with each project. The 20 Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology
  24. 24. amount of this fee has not been publicly release Hawaiian officials will have to work with their yet; the Office of Management and Budget (OMB) state energy regulators and state utilities. This and DOE are still working on this issue. Even also will require Hawaii to look at energy policy with these fees, the unpredictably of when a loan mechanisms in other states and potentially other guarantee will be offered continues to hamper the countries to determine what it can adopt. About Program. a month ago, a voluntary agreement was signed with the state utility to determine how it can Mr. Leighton asked about capital versus operating become a partner in Hawaii’s RPS program. costs for energy efficiency and renewable energy Issues that are being investigated include feed-in projects. In New England, he explained, a lot of tariffs, smart metering, and other utility programs. effort is expended to maintain communications Mr. Bond also noted that the DOE FEMP with state energy regulators regarding local energy responsibilities include understanding state energy policy. There is more than $400 million in “sys- regulatory issues. tem benefit charges” in New England. He asked if DOE is connected with state energy regulators Mr. Preston noted that, for investors, the up-front to determine how the use of energy efficiency and capital costs are the biggest barrier to most energy renewable energy technologies will affect state rate efficiency and renewable energy technology deals payers and other local energy generation policies. in the clean technology sector. Mr. Bond replied that, in general, his office does Mr. Habicht commented that, in the past in New have responsibility for these issues. He explained England, air regulators have met with utility regu- that if consumers can overcome the higher capital lators. At the federal level, both EPA and DOE costs for renewable energy sources, then the should establish communications with the Federal operating costs work to their advantage because Energy Regulatory Commission (FERC) because they often are negligible. Mr. Bond noted that utilities are very sensitive to energy regulatory to achieve its 70 percent RPS goal by 2030, policies. Discussion of Alternative Financing Instruments: Loan Guarantees, Loans, Venture Capital Funds, Grants, etc. Mr. Habicht stated that the DOE presentation of the U.S. Department of Agriculture (USDA). offered some useful insights into how current Mr. McAfee explained that one of the Cagan federal programs work and this can provide the McAfee portfolio companies is at USDA today basis for the discussion of alternative financing securing a loan guarantee approval. The applica- instruments. tion was submitted just 30 days ago, and it is being approved today. The funding will be avail- Mr. McAfee noted that DOE has developed a able in 30 days. The USDA has a good template useful roadmap for financial instruments for large for effectively executing loan guarantees and other companies that have good credit ratings from federal agencies should learn from that experience. Moody’s or Standard and Poor’s. Unfortunately, venture capitalists do not work with companies Mr. McAfee stressed that the DOE Loan Guaran- of this size and revenue status. Mr. McAfee tee Program can be an important accelerator for suggested that DOE and other federal programs the clean technology sector but the Department’s have to extend their financial assistance programs inability to process a loan is hurting the Program beyond Fortune 50 companies. His opinion is that and the industry. Given the status of the current the DOE Loan Guarantee Program needs to be credit markets, Mr. McAfee suggested that DOE amended. If EPA is considering a loan guarantee is now the “perfect partner” to assist the clean program, the Agency should examine the programs technology sector. He encouraged EPA to offer Report of the EPA–Venture Capital Community Summit: Exploring Programs to Commercialize Environmental Technology 21