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<title>July 2003: "Of Yogurt, ,Energy, and E-Q-Tel"</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
July 2003</u></b></p>
<p align="center"><font size="6">"Of Yogurt, Energy, and E-Q-Tel"</font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2</em>003/08/11)<br>
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<p class="MsoNormal"><span style="font-family:Arial">Each day sees new
consumer breakthroughs, notably in convenience of consumption. Now, yogurt
can be slurped from tubes, gulped from cups, chomped frozen or spooned.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">Not so, new energy
technologies – birthed in the warm wombs of public grants – they frequently
lie stillborn and unknown, the topics of dusty proceedings and crum-bling
color photo hype. Once, this was a subject of policyhand wringing. Various
means to wean the U.S. off dependence on foreign resources were proposed:
Project Independence; a National Energy Act billed as the moral equivalent
of war; an unleashing of domestic energy resources development through
deregulation. Now the dependency issue is the province of the prophets of
sustainable energy and would-be IPO bubble blowers. The U.S. motto seems to
be: we’d rather fight than switch fuels. Looming natural gas shortages and
possibilities of international tumult do not deter us.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">Why is that?
Essentially because in our market economy, the future potential of the
untried energy technology must compete with the marginal cost of the here
and now sources of supply, abetted by ever-more-sophisticated financial
technologies for future price risk management. Multi-formed, easier-to-eat
with one hand yogurt reaches the consumer; hydrogen technology bubbles in
trial technologies but does not reach the marketplace.</span></p>
<p class="MsoNormal">T<span style="font-family:Arial">he National Renewable
Energy Laboratory (NREL) of the Department of Energy thinks it knows the
reason and has now published a report, "Bridging the Valley of </span>
<span style="font-family:
Arial">Death</span><span style="font-family:Arial">: Transitioning from Public
to Private Sector Financing" (the "Report") to explain. Essentially, it is a
tale of two cultures that, according to the Report, do not really know each
other – although I am inclined to believe that isn’t the case. One culture
is the world of funding by the public sector – high risk, long-term
research, some shared demonstration projects, hands-off competition, and
the” hope that the private sector will exercise its option to further invest
in entrepreneurial ventures based on these technologies." The other culture
is comprised of private sector investors seeking returns on investment and
profits. Of them, the report almost incredulously states, "As venture
capitalists like to say – they are, after all, capitalists." In the shadow
of alleged "vague understanding" between these groups falls NREL’s
dramatically styled, cash flow "valley of death": the period between
technology creation(a game at which the public funders will play) and "early
commercialization" (which they won’t), where the prospects for an upturn in
cash flow are progressively higher and, accordingly, the rate for capital is
progressively lower. This is the time of "Market Focused Biz and Product
Development," when someone already is trying to squeeze the yogurt into the
tube and figure out whether kids will buy it, but no one will fund the
uncertain advanced prototype. Angel and venture capital financing may not be
available.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">The Report offers a
hybrid of a government/consultant-speak explanation of one primary source of
this problem. It is something called "information asymmetry”: the
entrepreneur knowing more about his technology and company’s prospects than
investors or strategic partners. Multiple and varied prototypes are
necessary. The drivers for new technologies are frequently technical
researchers with limited business experience. Result: down in the valley,
the private sector investor’s perceptions of resulting risk are too great.
So what is a benevolent government to do? Foster "information exchanges," of
course! If only we all could get to know and understand each other
better…And, anyway, setting up non-profits, web sites and trade fairs is
inoffensive fun and not obstructive of the ongoing work of the world. Feel
like the old Bell Labs, even though the energy business is most Lucent-like
in its bottom line orientation.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">It does not do the NREL
report justice to mock it for staying with this most traditional and
eunuch-like of positions. Its authors know something about the real energy
world – indeed, the real business world. There must be value added. In the
"valley of death," there is a lack of real market-driven products and a
market that is significantly served by commoditized products with low
margins and high volatility. In short, there is an uncertain world with high
risks, which is therefore not one investors necessarily will spring for.
Unfortunately, Federally-sponsored. Spock guides to bringing-up-baby
technologies won’t, by themselves, overcome the reflexive fear of failure.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">In my view, the
cultural chasm delineated by the Report is not, in fact, an accident of the
division of the world into brilliant geeks and sleek MBAs. It reflects
public policy, as strongly motivated by private corporate interests that,
understandably, do not want to find them-selves competing with the outputs
of a corporative government sector. Whence, the grudging political
acceptance when Uncle Sam and companies (at least, most companies) form
"public-private partnerships."</span></p>
<p class="MsoNormal"><span style="font-family:Arial">Interestingly, though,
when the government really wants some-thing, it procures it. And if the
technology is not there to respond to the procurement, it has begun to seek
to create it. That is what is happening in the homeland security and defense
areas. As an NREL footnote on what is blandly-styled, "novel co-investment
partnerships with the private sector" notes: the CIA recently initiated the
E-Q-Tel venture fund, and the U.S. Army has initiated a similar venture fund
to assist with the development and commercialization of technologies that
sup-port their missions by building more effective relations with private
sector venture firms and potential innovators. Want a WMD-squirting yogurt
tube that you can zap a bad guy with? Don’t wait for Dannon to develop it
for you. Give them a call – or tap into innovative "subcultures." The same
logic applies to the next new tiger in your tank or spark on your wire.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">Which leads to a key
question (whose answer is not self-evident): how serious is the government
about identifying future sustainable secure sources of U.S. energy? Enough
for a tax credit? Maybe. Enough for an E-Q-Tel? Certainly not, if you call
it "industrial policy." Possibly yes, if you call it re-establishing
America’s secure future through technology procurement.</span></p>
<p class="MsoNormal"><span style="font-family:Arial">Somewhere between the
"valley of death" and the shadow of the squirting yogurt tube falls the
future of America’s global ascendancy, as its fossil resources fade (or
threaten to blacken the sky), and its efficient short-term marginal cost
pricing renders thoughts about long-term capacity a matter off limits for
policy response.</span></p>
<p class="MsoNormal"><span style="font-family:
Arial">America</span><span style="font-family:
Arial">’s technology engine is entrepreneurial; but its foresight needs to be an
energy E-Q-Tel. Yogurt innovation should not outstrip energy innovation.</span></p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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