Amid Partisan Bickering, Everyone Agrees: ARPA-E Is a Fascinating Experiment

Source: By Ross Andersen, The Atlantic • Posted: Monday, September 10, 2012

Last week, the New York Times reported on an exciting new energy project that is scheduled to begin testing off the coast of Oregon in early October. A company called Ocean Power Technologies is going to lower a 260-ton generator into the Pacific ocean, just 2.5 miles from the shore, in order to capture renewable energy from waves. The buoy generator will link up to the grid and, if it works, could generate enough electricity to power 1,000 homes.

Like many new experiments in renewable energy, the Oregon project was partially funded by a grant from the Department of Energy. In previous decades, the Department of Energy drove basic research by operating giant government-funded labs, but under the leadership of Energy Secretary and Nobel Laureate Steven Chu, the agency has transformed itself into something different: the biggest, greenest venture capital firm in the world.

After receiving an unprecedented surge in funding for renewable energy courtesy of the American Recovery and Reinvestment Act, Chu set to work hiring big names from the nation’s top research laboratories, in order to staff a new agency called ARPA-E, modeled after DARPA, the R&D wing of the Pentagon. In just three years, ARPA-E has made more than 180 investments in basic research projects in renewable energy, and that’s in addition to grants issued by the Department of Energy proper, like the one that funded the Ocean Power Technologies project in Oregon.

Michael Grunwald, a veteran reporter for TIME Magazine, is the author of The New New Deal, a new book that details the history of the much-maligned American Recovery and Reinvestment Act (commonly referred to as the Stimulus bill). In preparing to write The New New Deal, Grunwald did extensive research on the Department of Energy’s Stimulus-funded quest to uncover an energy alternative to fossil fuels. Recently, I talked to Grunwald about his new book and the “silent green revolution” that is currently underway at the Department of Energy.

The New New Deal is a narrative about President Obama and his $800 billion stimulus bill, but it also has an argument. Can you quickly lay out the argument, and specifically how it relates to research and clean energy?

Grunwald: Sure. The argument is that everything you think you know about the stimulus is wrong. It was not a pathetic failure. It helped prevent a second depression and end a brutal recession in the short term; it was a huge down payment on Obama’s campaign promises to transform the U.S. economy for the long term. But clean energy was the real outlier, getting $90 billion when the U.S. had been spending just a few billion a year. There were unprecedented investments in wind, solar, and other renewables; energy efficiency in every imaginable form; a smarter grid; cleaner coal; advanced biofuels; electric vehicles; the factories to build all that green stuff in the U.S., and yes, clean energy research.

That money has really launched a silent green revolution. For example, the renewable electricity industry was on the brink of death after the 2008 financial meltdown; the Spanish wind developer Abengoa had shut down its U.S. projects, and turbines were literally rusting in the fields. The day the stimulus passed, Abengoa announced it was investing $6 billion in U.S. wind farms. When Obama took office, we had 25 gigawatts worth of wind power in the U.S., and the official federal energy forecast called for 40 gigs by 2030. It’s now 2012, and we already have 50 gigs. The stimulus also jump-started the smart electric grid. It created an advanced battery industry for electric vehicles almost entirely from scratch. And so on

In the book you describe a new federal agency, ARPA-E, a stimulus-funded incubator for alternative energy technologies that is the brainchild of Secretary of Energy Steven Chu. Can you describe how ARPA-E came into being?

Grunwald: The stimulus didn’t create vast new armies of government workers at alphabet agencies like the WPA or CCC; ARPA-E was its only new agency, with a staff the size of a major-league baseball roster. But it’s a really cool agency, the kind of place where Q from the James Bond movies would want to work. It actually had its roots in the Bush administration, when Chu served on a National Academy of Sciences panel on American competitiveness that released a report called Rising Above the Gathering Storm; one of its recommendations was an energy research agency modeled on the legendary DARPA at the Pentagon. The idea was to finance out-of-the-box, high-risk experiments, like an early-stage venture capital firm. Congress authorized it, but never gave it money to launch until the stimulus.

The early days at ARPA-E were pretty insane. Its first couple of employees had to put out its first solicitation, and it was inundated with 3700 applications for its first 37 grants, which crashed the federal computer system. But they attracted an absurdly high-powered team of brainiacs: a thermodynamics expert from Intel, an MIT electrical engineering professor, a clean-tech venture capitalist who also taught at MIT. The director, Arun Majumdar, had run Berkeley’s nanotechnology institute. His deputy, Eric Toone, was a Duke biochemistry professor and entrepreneur. Arun liked to say that it was a band of brothers; I like to think of it as a $400 million Manhattan Project tucked inside the $800 billion stimulus.

“I like to think of it as a $400 million Manhattan Project tucked inside the $800 billion stimulus”

ARPA-E has spent a lot of money on the search for new biofuels, in particular a special algae-based biofuel brought about by a synthetic, high-efficiency version of photosynthesis. What distinguishes these fuels from corn-based fuels, which are often criticized as being as wasteful as fossil fuels?

Grunwald: As you may know I’m a biofuels skeptic. I wrote a TIME cover story titled “The Clean Energy Scam” that sounded the first big warning that farm-based biofuels–not just corn ethanol but palm oil, soy biodiesel, and anything else that used arable land–were ecological disasters in the making. When we put food in our gas tanks, we end up pillaging carbon-storing wetlands and rain forests to grow more food. But the stimulus included massive investments in second-generation biofuels made from farm waste, municipal trash, and other feedstocks that don’t need farmland.

ARPA-E is also investigating more futuristic biofuels. I tell a story in my introduction about how Chu was skeptical of photosynthesis. It’s been working pretty well for the last 3.5 billion years, but Chu thought it was too inefficient to make fuel. So the ARPA-E brainiacs started thinking about it, and invented an entirely new scientific discipline that they’ve dubbed “electrofuels,” essentially trying to genetically re-engineer exotic microbes that absorb energy without photosynthesis to produce fuel. It’s pretty wild. They had no idea whether this stuff would actually work, but at last year’s ARPA-E summit Majumdar held up a vial of electrofuel created in a North Carolina lab that has already powered a jet engine. Now the question is whether this kind of thing could be mass-produced at an affordable cost. As one of the ARPA-E guys told me: Now we know it works. We just don’t know if it matters.

What other game-changing technologies have come out of ARPA-E?

Grunwald: It’s still early, of course, and part of the excitement is that nobody knows which experiments will change the energy game. ARPA-E is financing projects to test better and cheaper batteries, more efficient air conditioners, new carbon capture and sequestration technologies, alternatives to rare-earth materials, and so on. Maybe electrofuels that bypass photosynthesis will be the next big thing; there’s also a program that will try to manipulate photosynthesis to create Frankenplants that excrete crude oil. Most of the projects are going to fail, but a few success stories could transform the entire energy economy.

So far, more than a dozen ARPA-E-funded companies have already attracted follow-up venture funding. They’re very excited about 1366 Technologies, which has developed a new solar manufacturing process. Basically, instead of slicing silicon ingots like salami, which is a difficult way to make wafers and wastes a lot of silicon dust, they’re creating the wafers directly from liquid silicon like pancakes, which could cut the price of solar panels by a third. The other big winner so far is Envia Systems, which has developed the world’s most powerful lithium-ion battery; it could slice $5000 off the cost of the second-generation Chevy Volt. But there are all kinds of exciting projects: lithium-air batteries that could put lithium-ion out to pasture someday, wind turbines shaped like jet engines, electric transformers the size of a suitcase instead of a kitchen, laser drilling technology that could cut costs of geothermal wells as well as petroleum wells. We’ll see what pans out.

Is there a precedent for this kind of thing? Is there a history of government-funded basic research driving innovation in energy?

Grunwald: Yes, and one of the frustrations for Chu and other American scientists has been watching technologies developed in the United States with federal assistance–photovoltaic solar panels, lithium-ion batteries, modern wind turbines–drift abroad, both on the manufacturing side and the adoption side. Government investment played a huge role in jump-starting the info-tech and bio-tech industries, and it’s already playing a huge role in clean-tech.

And who ended up getting political credit for those successes?

Grunwald: If anyone, it was probably whoever happened to be holding the scissors at the ribbon-cutting. That’s the nature of blue-sky research. The stimulus poured $10 billion in NIH, and already driving some exciting breakthroughs in cancer research, Alzheimers, genomics, and much more. But it’s not like Obama is getting any credit. You invest in research because it’s the right thing to do.

One of the arguments for serious government investment in alternative energy is the relative dearth of private sector investment in alternatives to fossil fuels. What does the R&D scene look like for alternative energy in the private sector?

Grunwald: Well, before the stimulus, it was abysmal; biotech firms like Amgen and Genentech had larger R&D budgets than the entire energy sector. And the Energy Department’s research budget had dropped 85% in constant dollars over three decades. The stimulus helped jump-start new industries, like the smart grid, but I think it’s too early to say whether the public and private sectors will continue to invest in the R&D side

You make a persuasive case that under Steven Chu the Department of Energy shifted from a typical government agency to something like a venture capital firm. Let’s talk about Solyndra, the failed solar company and $500 million black eye for the Recovery Act, and the Department of Energy. Was Solyndra an outlier?

Grunwald: It wasn’t an outlier and it wasn’t a scandal. It was a loan that went bad, something that happens to any lender. If the clean-energy loan program–which was created during the Bush administration to encourage investment in innovative green enterprises–had a perfect record, that probably would indicate it was making overly conservative loans that didn’t require public assistance.

A few reminders about Solyndra: It was an incredibly innovative company with an entirely new approach to solar, and it attracted $1 billion in private capital. The Bush administration selected it from among 143 applicants for the program’s first loan; it didn’t quite get completed before Bush left office, but it was at the top of the pile when Obama took over, and Republican investigators found nothing in the 300,000 pages of documents they subpoenaed to suggest there was anything hinky or political about the decision to award the loan. The company had an impressive customer list, from Frito-Lay to Southern California Edison, and its revenues were soaring when it failed. Its problem was a spectacular drop in solar prices, which was terrible for its business model as a manufacturer, but great for the U.S. solar industry, which has increased installations 600 percent since the stimulus passed.

Again, it was inevitable that some of these loans would fail; as one White House official pointed out to me, some students who get Pell Grants end up drunks on the street. But it’s not like the Obama administration just invested in Solyndra. A review led by John McCain’s finance chairman found that overall, the $40 billion loan portfolio is doing fine; it’s got reserves to cover half a dozen Solyndra-style failures, and it’s financing the world’s largest wind farm, a half dozen of the world’s largest solar farms, America’s first cellulosic biofuel refineries, and much more. The larger point is that the stimulus isn’t really picking winners and losers in the traditional sense; it’s picking the game of clean energy, and financing thousands of different entrepreneurial and technological approaches to the problem, so that the market can pick the winners and losers. For example, the stimulus created a domestic advanced battery industry for electric vehicles from scratch, financing 30 different factories, a classic case of industrial policy. But it also financed all kinds of biofuels that will compete with electric vehicles, and more fuel-efficient internal combustion engines, and research into lightweighting, and so forth.

The larger goal is to reduce our dependence on foreign petro-thugs, our carbon emissions, and our vulnerability to price shocks, while creating millions of jobs in new industries of the future. There ought to be great debates about that. But we’ve been stuck in an imaginary debate about crony capitalism and waste.

Do you worry about the political and institutional resilience of ARPA-E? The conventional wisdom is that the Department of Energy got locked into this Cold War driven lab structure, with these big national labs sucking up all the funding and becoming dedicated to prolonging their own existences more than anything else. ARPA-E was designed to be more nimble, and to operate more like a dynamic VC firm. But along with the downsides of the lab system, there are some serious upsides—in particular, the labs are big job creators in particular states, they have powerful connections and important people care about them. That gives them a kind of political and institutional resilience that I’m not sure ARPA-E will have.

Grunwald: It’s a legitimate fear. But so far, ARPA-E may be the only creation of the stimulus that Republicans don’t hate. It got follow-up funding at a time when dozens of other traditionally bipartisan line items–unemployment benefits, middle-class tax cuts, health IT, and so forth–became partisan political footballs because Republicans wanted to kill everything in the stimulus. Mitt Romney constantly attacks Obama’s green energy policies, but he has said he supports ARPA-E.

“Mitt Romney constantly attacks Obama’s green energy policies, but he has said he supports ARPA-E”

And he did have a similar venture fund when he was governor of Massachusetts; it had some Solyndra-type failures, but it also financed a company that became BigBelly Solar, which makes awesome solar-powered garbage compactors. Thanks to the stimulus, BigBellies are becoming quite common in national parks and major cities.

I know that battery technology has been a huge focus for the Energy Department—is the stimulus bill going to give us iPhones that last a week on a single charge?

Grunwald: ARPA-E has very specific targets for electric vehicle batteries, and Envia is hitting them. But you never know what you’re going to find. One stimulus-funded company that’s gotten a lot of bad press is A123 Systems, which had some big problems with its batteries for the Fisker Karma, and is now getting taken over by a Chinese firm. But while he was working on A123’s batteries, the MIT scientist who founded the company, Yet-Ming Chiang, got an idea for an innovative “flow battery” that could someday store power for the entire grid. He got an ARPA-E grant, and he’s raised some follow-up VC cash. Another stimulus-funded company, Solazyme, is using algae to make fuel. It’s already supplying the Navy’s Green Fleet, but it’s just getting started, and it doesn’t have the kind of scale to compete on a level playing field with fossil fuels. But Solazyme recently went public, because it’s using the same technology to make anti-aging creams, which it can sell for about 1000 times the price of fuel. And those revenues could buy it time to cut its fuel costs.

In the book you note that the Department of Energy, which had a $1.2 billion dollar budget for renewables and efficiency, received a $16.4 Billion infusion as a result of the Recovery Act. That’s an enormous increase. What kinds of issues did the Department of Energy run into when it came time to spend these huge, budget-multiplying infusions of cash?

Grunwald: If I can indulge in a bit of self-promotion, I think your readers will really enjoy this part of my book. I think The New New Deal is a great yarn, and the fly-on-the-wall stuff inside the White House and the halls of Congress have gotten a lot of press. But some of my favorite scenes take place in the bowels of the department, where Chu and a McKinsey partner try to shake up a sclerotic bureaucracy to ramp up 144 programs to stimulus speed, where one of the founders of SunEdison tries to shake up a flailing weatherization division known as “The Turkey Farm,” where Rahm Emanuel pitches a fit about the slow pace of the smart grid. Some of the stories sound like real-life Dilbert cartoons. But some of them are quite inspiring.

Obviously it takes time to convert the insights of fundamental research into scalable technologies. When do you expect the benefits of ARPA-E to trickle out to the public?

Grunwald: I think they should start to trickle out over the next few years. For example, 1366 has already “graduated” from ARPA-E to a loan guarantee; now it’s building its first factory. If Obama is reelected, he should have some fun breakthroughs to celebrate in his second term. And I suspect that if Romney wins, he’ll be only too happy to take credit for the celebrations on his watch.