Scaling Innovation: A Proposed Framework for Scaling Energy Demonstrations and Early Deployment

“America’s energy innovation ecosystem lacks a mechanism to build, test, and refine large-scale technologies. Many technologies that need demonstration assistance are too big, expensive or risky to go forward by traditional means.”

—AEIC’s 2010 report, A Business Plan for America’s Energy Future¹

The American Energy Innovation Council (AEIC) has been working since 2010 to advance policies aimed at strengthening America’s innovation capabilities in clean energy technology. As decarbonization efforts gain momentum worldwide, leadership in developing and commercializing zero-carbon and negative carbon technologies is a critical strategic and competitive priority for the United States. The AEIC’s Scaling Innovation Advisory Group, which includes entrepreneurs and experts from industry, finance, academia, and government, came together to focus on essential but often challenging steps in the innovation life cycle: demonstration and early deployment.

This focus is prompted by a recognition that demonstration is often the weak link in transitioning a technology from the early stages of innovation (i.e., research and development—often funded by the government) to a commercial product and mass deployment. The private sector does not fund demonstration because the market does not appropriately price the externalities of existing and new technologies; therefore, public resources must be activated. Yet despite the importance of demonstrations—to develop critical technical and operational know-how and to reduce the operational and financial risks associated with deploying a new technology—the federal government’s track record of supporting early-scale-up, large-scale demonstrations, and deployment of commercial scale first-of-a-kind energy innovations is mixed at best.

How this track record might be improved through a strengthened and more focused federal role is the subject of this paper. We have two central recommendations for Congress:

1. Increase funding for the Advanced Research Projects Agency – Energy (ARPA-E) and bolster that agency’s new SCALEUP program, which is focused on early technology scale-up and prepiloting (SCALEUP stands for Seeding Critical Advances for Leading Energy Technologies with Untapped Potential).
2. Create a new independent federal institution—called, for purposes of this discussion, the Energy Demonstration and Finance Corporation (EDFC) —that would have the financial tools and project management capabilities to better support large-scale energy technology demonstrations and deployment.

The AEIC has been a strong supporter of ARPA-E and views the expansion of the agency’s capabilities to pilot new technology as a statutory responsibility and key to filling the early-stage demonstration gap. The SCALEUP program can help bridge the “valley of death” between research, development, and demonstration by supporting earlier scale-up and prepilot projects and thereby helping to advance technologies along the innovation life cycle. Few other entities have the flexibility and expertise to conduct this important activity, yet it is impossible to move into large-scale demonstration without passing through these critical steps in the innovation process. Expanding ARPA-E’s SCALEUP program will provide a robust pipeline of technologies that are ready, with the support of the new financing institution we propose, for large-scale commercial demonstration and deployment.

The creation of an Energy Technology Corporation would represent a monumental change in how the U.S. commercializes energy technologies. We envision a wholly owned government corporation that combines the project development and large-scale demonstration capabilities of the U.S. Department of Energy (DOE) Office of Clean Energy Demonstrations and DOE’s existing Loan Programs Office; the broad range of mass deployment financing tools of the (proposed) Clean Energy Deployment Administration (CEDA) and green banks; and the governance structure of both the (proposed) Energy Technology Corporation (ETC) and the (existing) U.S. International Development Finance Corporation (DFC).

To position the EDFC for success, we recommend that this new entity be established with:

• An initial congressional authorization and upfront appropriations of $ 60 billion for at least 10 years of operation
• An explicit focus on large-scale demonstration and early-stage mass deployment of advanced energy technologies
• An independent board of directors, nominated by the president and appointed with the advice and consent of the Senate, to govern the organization
• Special hiring authority to attract individuals with energy-sector experience who have specialized financial and technical skills, including individuals outside the professional civil service system who could be hired on a temporary basis at commercially competitive salary levels
• Authority to implement a broad set of financial tools, including contract, grant, and cooperative agreement authorities as well as the ability to provide direct loans, loan guarantees, and letters of credit, and to offer equity investments, insurance products, securitization for resale, and other means of secondary market credit enhancement

Establishing the EDFC would be a natural step in DOE’s evolving approach to the energy innovation and commercialization process. In the short term, strengthening DOE’s loan programs and launching a new Office of Clean Energy Demonstrations within DOE will help build financial and project management capabilities and fill important gaps in the existing innovation system. Longer term, the EDFC, as an independent agency, would better coordinate and execute these capabilities as a single entity that has a degree of additional freedom from political interference.

The ARPA-E early prepilot demonstrations and the EDFC large-scale demonstration and deployment proposals complement previous AEIC recommendations, which call for tripling the federal government’s overall investment in energy innovation, increasing ARPA-E’s budget to $1 billion per year, and creating a New Energy Challenge Program2 to demonstrate energy technology breakthroughs at commercial scale.

These recommendations are important for closing the demonstration and deployment gaps in the innovation cycle, and can help unlock major new energy advancements for our nation. Much is at stake in the race to reduce CO2 emissions. The objectives of the energy transition should be broad and include additional priorities such as job security and quality, community development, and domestic supply chains for products and

skilled labor. To successfully bring forward these objectives, the EDFC will need to ensure it approaches its work with equity in mind, incorporating a diverse leadership structure with experts from labor, environmental organizations, and the private sector as well as strong community engagement.

To provide context for these recommendations, we review AEIC’s previous work on large-scale demonstration and outline the case for a meaningful federal role in closing demonstration and deployment gaps. Next, we describe existing models for effective federal engagement in these areas. We conclude with further discussion of our two central recommendations in this paper: strengthening ARPA-E and implementing the Energy Demonstration and Finance Corporation concept.

The AEIC Scaling Innovation Project is focused on addressing the challenges inherent in the demonstration and deployment of new energy technologies. The recommendations outlined in this paper reflect insights and ideas generated by a series of case studies and workshops that examined the role of demonstration projects in commercializing new clean energy technologies.

A Scaling Innovation Advisory Group, which included entrepreneurs and experts from industry, finance, academia, and government, came together to advise the AEIC on the critical but often challenging steps in the innovation life cycle: demonstration and early deployment. Between March and November 2020, AEIC held seven workshops on the need for greater federal support for demonstrations and deployment. The Advisory Group invited guest speakers from DOE, investment groups, private companies, and think tanks to highlight critical barriers to demonstration and deployment of new energy technologies. The successes and failures of several federal programs were analyzed for lessons learned. While critical characteristics and capabilities began to emerge, important conversations took place regarding political feasibility and timing.

The AEIC commissioned four experts to analyze case studies that examined the role of demonstration projects in the commercialization of new technology, particularly clean energy technology. The resulting case study reports are summarized below:

1. A Review of Federal Efforts to Demonstrate Carbon Capture and Storage with Commercial- scale Coal-Based Power Plants (2003–2016), by Eric Redman, highlights the management and technical challenges inherent in demonstrating first-of-a-kind technology, especially technologies that integrate two different subsystems. The report also describes the high cost of political interference in the demonstration of new technologies.
2. The U.S. Clean Energy Deployment Administration: A Business-Driven Approach to Leveraging Private Sector Investment in Clean Energy Innovation and Commercialization, by Dan Reicher. Reicher’s report showcases the political feasibility of the proposed Clean Energy Deployment Administration and the value it could bring to the deployment of new technology through a broad range of financing mechanisms. Additionally, Reicher argues that CEDA should be a part of the federal government so that it is backed by the full faith and credit of the government.
3. The American Recovery & Reinvestment Act and the Rise of Utility-Scale Solar Photovoltaics: How U.S. Public Policy During the Great Recession Launched a Decade-Long Solar Boom, by Varun Sivaram, describes the origins of the commercial-scale solar energy expansion in the United States and the DOE Loan Program Office’s important role. In particular, the case study highlights the need for complementary policies and the importance of this new DOE program that filled a critical early deployment gap and had an ability to hire both technology experts and private sector project financing experts
4. Flying Laboratories, Prototyping, and Dem/Val: The Crucial Role of Technology Demonstration in Advancing Military Innovation and Its Relevance for the Department of Energy, by Dorothy Robyn, discusses the role of technology demonstration in the U.S. military’s innovation process, which has driven advances ranging from GPS to the internet. Robyn draws lessons from the military’s approach that are relevant to DOE and to the ongoing debate over how the federal government should support large-scale energy demonstration projects. She also looks at whether the Department of Defense can play a broader role in demonstrating new energy technologies that have civilian (as well as military) applications.

AIEC’s workshops, along with the case studies, and many one-on-one conversations informed the recommendations contained in this paper. In addition, the Scaling Innovation Advisory Group considered technical and political challenges to overcoming barriers to demonstration resulting in the recommendations contained here, which we acknowledge are a combination of pragmatism and ambition.