Let me congratulate the Department of Energy and ARPA-E on this third successful Energy Innovation Summit, and thank Secretary of Energy Steve Chu and ARPA-E Director Arun Majumdar for inviting me today to speak.

All of us know that science and innovation plays a fundamental role in shaping our energy future.  We also know that we are not spending enough on research and development in the energy sector.  Such investments amount to something like 0.3 percent of sales, a very small amount when compared to the pharmaceutical industry, where R&D approaches 19 percent of sales, and computers and electronics where it is closer to 9 percent.  And yet, we have seen that innovation in energy can have revolutionary impacts on energy markets. 

Perhaps the most recent and dramatic example of this is the advent of new subsurface imaging and drilling technologies in the search for natural gas and oil.  Five years ago, it was thought that the United States was running out of oil and gas.  We were preparing to construct significant numbers of import terminals for liquefied natural gas to be brought to our shores from around the world.  Thanks to the combination of horizontal drilling and hydraulic fracturing techniques, we now are looking at an immense new supply of natural gas, not just in the United States, but worldwide.  Further, the application of the same techniques that are used for natural gas to oil-rich unconventional geological formations has reversed a decades-long and seemingly unstoppable decline in U.S. domestic oil production.  These developments have overturned many assumptions that people have had about the future course of our energy policy, and it would not be too much of an exaggeration to put these technologies in the category of “disruptive technologies.”

This is not the only example of how innovation will play a game-changing role in reshaping our energy picture in the United States.  ARPA-E is precisely designed to seek out and fund new disruptive technologies to meet our energy challenges.  Whether it is programs—

• to develop non-food crops that directly produce transportation fuel,
• to advance thermal energy storage and grid-scale electric storage,
• to dramatically improve batteries, or
• to develop cost-effective alternatives to rare earth elements in energy applications—

ARPA-E is making a difference by making strategic investments and leveraging substantial private-sector funding of these advanced technologies in the process.

ARPA-E is a key element, but not the only element, in building what one might characterize as an “ecosystem of energy innovation” in this country.  There are other important parts of the ecosystem, both on the technical side and the policy side.

On the technical side, let me mention just 3 of those important elements.  They are the individual-investigator research of the Office of Science, the larger groups funded at the National Laboratories and by the Energy Frontier Research Centers, and the more macro approach taken by the Energy Innovation Hubs.  They all complement, on the technical side, the high-risk, high-reward, projects and programs of ARPA-E.  But, to have a major effect on our energy future, all these technical initiatives need to be supported by a forward-leaning energy policy.

It is not enough to innovate and invent and then to hope for the best in terms of technology adoption and diffusion.  Our national and international energy systems are complex.  They do not operate according to pure free-market principles.  They are already highly regulated by international, national, regional, and even local entities – from OPEC setting global targets for the amount and price of world oil production, to your local zoning board deciding whether you can install a solar panel on your roof.  So, because of that reality, we have no choice but to try to define and implement the most sensible energy policies that we can, because to do nothing is, in itself, a choice for leaving them up to essentially a random set of policies.

Today, we face some very formidable obstacles to adopting an energy policy that can link up with energy innovation.

The first and most obvious obstacle, if you are watching the news, is partisan politics.  Energy, and energy prices in particular, is seen as a convenient place to launch political attacks during an election year.  In the process of trying to use energy as a political wedge issue, various parts of the energy spectrum get identified as either Republican or Democratic territory.  Constructing a sensible overall policy in that context becomes much more difficult.

Because of the heightened levels of partisanship in energy over the last 5 years, we have seen an unraveling of what up until recently was a fairly strong bipartisan consensus on energy policy.  In 2005 and 2007, Congress enacted two major energy policy bills, as well as a major innovation bill in the form of the America COMPETES Act.  Those bills reflected a general push towards cleaner sources of energy, harnessing 3 different policy tools.  The first tool was regulation – particularly in the area of improved energy efficiency.  The second tool was increased spending on innovation and deployment of advanced technologies.  The third tool was tax incentives to make technology adoption more affordable.  At the same time that those two bills in 2005 and 2007 employed these tools to advance clean energy, they also recognized that existing sources of energy, like coal, oil, and gas, would continued to be needed as we made a transition to a cleaner energy mix.

It would be fair to say that all 3 policy tools that commanded bipartisan political consensus 5 years ago are now under sustained attack. 

In terms of the policy tools of regulation, one of the most effective long-term provisions of the 2007 Energy Independence and Security Act was a set of consensus standards on improving efficiency in appliances and lighting.  Those standards in the lighting area were agreed to, and are still supported by, a broad coalition of efficiency advocates and the affected industry.  Based on that consensus, the U.S. lighting industry made very substantial investments over the last 5 years in reworking their product lines and manufacturing facilities.  Today, we can walk into any Home Depot or Lowe’s and see a wide array of lighting choices – from improved incandescents to LED light bulbs – all of which are guaranteed to save the consumer money.  Yet, these efficiency standards have become fodder for political attacks on cable TV and in Congress.  Even though there is a reasonable consensus in industry on other new efficiency standards that would be desirable to implement, it’s probable that we could not pass a bill with those improved efficiency standards today.

In terms of policy tools that increase spending on technology innovation and deployment, we also face strong political headwinds.  One of the strong areas of bipartisan agreement in past energy bills was to provide loan guarantees and other financing support for the deployment of the first few-of-a-kind major projects involving advanced energy technologies.   I doubt that we could have seen the first new nuclear plant in 30 years move forward over the last month, without the existing commitment to that sort of financing support.  And the loan guarantees financed by the American Recovery and Reinvestment Act have made possible the construction of numerous new clean energy technology projects at scale.  Those projects will allow the market to understand what the actual cost and schedule is for deploying those technologies.  That that will allow capital markets to function more effectively in the future.  But, all I have to do is to say the word, “Solyndra,” and you know how that bipartisan consensus on energy project financing has evaporated, in favor of an attempt to paint the loan guarantee program as some sort of big government scandal for use in the upcoming election.

The third of the policy tools is tax policy.  It is an area that has helped energy projects get built.  We just had a very disappointing exercise in trying to renew the production tax credit for wind power projects.  That tax credit only applies to projects placed in service by the end of this year.  Any wind energy project that is not already under construction now will not be finished in time to qualify.  So the incentive effect of the tax credit for wind power is now rapidly disappearing.  We tried to extend the tax credit during the recent consideration of the payroll tax cut bill that passed Congress this month, but the issue was declared not open for discussion by the House leadership.  We probably will see major retrenchments all along the supply chain for wind energy this year, as a result, with the loss of thousands of jobs.  Those are good jobs, those are energy jobs, but in our current political context, they are apparently not the right kind of energy jobs.

So, we face a very challenging environment this year for moving energy innovation forward at the national level.   We might have to wait until the results of this fall’s election are in, before we can make further progress.  In the meantime, though, there is a lot we can do to lay the ground for new ideas that might find a way forward when the current level of partisanship abates.  One of those ideas is a proposal for a Clean Energy Standard for electricity production. 

A Clean Energy Standard is not inherently a partisan proposal.  In the last Congress, during the discussion of a Renewable Electricity Standard in the Senate, several Senate Republicans publicly voiced their support for a more inclusive standard, such as a Clean Energy Standard, that would encompass all cleaner forms of electricity production, including nuclear and hydropower.  At the beginning of this Congress, President Obama moved in their direction by making a proposal for a Clean Energy Standard in his 2011 State of the Union address.  He endorsed that proposal again in this year’s State of the Union address.

Over the last year, I have worked to develop a proposal for a simple and effective Clean Energy Standard that I intend to introduce tomorrow.  It will take all electricity generating technologies that exceed the carbon efficiency of the current state-of-the-art supercritical coal generation, and award them credits scaled to their relative improvement in carbon intensity over that baseline.  Zero-carbon sources like new nuclear and renewables will get a full credit per kilowatt-hour produced.  Advanced coal technologies, such as oxyfuel combustion, will get partial credit; natural gas will get about a half-credit, and so on.  Utilities that sell electricity at retail will acquire and turn those credits in to meet a standard that, overall, will start off being fairly easy to meet.  The standard, though, will become cleaner and more stringent over time.  The result is intended to be a realistic and predictable market-pull on advanced energy technologies.  By having a long-term, predictable market for advanced electricity generation, we provide innovators with confidence and the ability to reach out and make their best case to investors and project financiers.

I don’t entertain the illusion that this proposal will sweep through Congress and be signed into law this year.  But I think this is an important discussion to have now.  It is important to carefully examine a concrete proposal for how a Clean Energy Standard might be constructed.  Our current system of on-and-off tax incentives, while partially helpful to new energy technology deployment, has proven not to be the sort of sustained signal that is really needed in order to unleash innovation into the marketplace.  We need more predictable long-term policy signals, if we want energy innovation to truly flourish.  If there are better ideas for how to do that than a Clean Energy Standard, then I hope they are proposed in concrete form as we discuss the proposal that I am going to make tomorrow.

As a nation, we possess incredible material and human resources, as well as remarkable natural resources for energy. How to spur energy innovation that fully uses those resources is one of our most pressing questions.  The answers to that question are multifaceted.  Partly, it requires breakthroughs in energy technologies.  I am very glad that ARPA-E is so successfully advancing new ideas and inventions of great commercial potential.  Other facets of the answer must address our broader social system of technology deployment and energy utilization.  The best, forward-leaning energy policy is one that is truly comprehensive across all these facets, from initial discovery to well-functioning markets.  All of these are needed if the United States is to lead in the advanced energy technologies that will power the 21st century.

Thank you for the essential role that you have already played in the broad spectrum of addressing our energy challenges.  I wish you all the best in your work at the frontiers of energy innovation.

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