Is this the way to finance green innovation?

Financing green innovation?

On the 11^th of October 2011 the Federal Government announced that a panel of experts, chaired by Ms Jillian Broadbent, was to advise on the design of the $10 billion Clean Energy Finance Corporation. Further, this corporation would overcome the well-known capital market barriers to commercializing clean energy technologies.

The key question is whether this is a sensible way to promote innovation?

This giant of a start-up fund will provide finance to renewable energy, energy efficiency and low emissions technologies. It will also invest in firms utilising these technologies as well as manufacturing businesses that focus on producing inputs to these technologies. However it will not finance carbon capture and storage, despite Garnaut Review and Treasury projections depending on the arrival in the 2030s of this technology. Of course, like Harry Potter, we dare not name the Voldemort of energy sources - nuclear power.

Innovation is something we have to have the politicians and academics tell us. The characteristics of innovation are either an unmet need - particularly successful opening a new business area where you might be the price setter, or a significant cost reduction or an enhancement in a product or process. But the main characteristic of an innovation is the random walk of those involved as they came upon their innovation.

No National Needs or Flagship programs will do it, but rather the thoughts and efforts of people in sales, marketing, production and research and development who find by interacting with their customers how to improve or produce new products.

Indeed surveys by the Australian Bureau of Statistics show in 2006-07 that only 2.6% of ideas for innovation were sourced from universities and 4.1% from government agencies. This result is not unique to Australia. Yet these institutions are the organizations that Garnaut wants to reshape the country.

*gathered from business, customers, competitors, conferences, journals and associations

Source ABS

But look at the evidence. Government institutions and universities don’t give much bang for the buck where 38% of Australia’s R and D expenditure generates only 6.7% of the ideas.  Universities of course play a key role in educating accountants, engineers, scientists and many others who do make the innovations in the companies where they work and may have even founded. The universities also publish results and hold conferences so research information enters the public domain.

The universities and government institutions are not the place to directly fund these clean energy technologies. The Co-operative Research Centres, those peculiar hybrid organisms, are predicated on co-operative research with business. But if businesses are in competition with each other then only non-competitive areas are open to shared research. Again this is not the best place to go.

So who spends on R and D in Australia? The table below shows the dominance of manufacturing and mining. An interesting feature is the R and D spending by financial and insurance services where $1.4 billion has been spent on “depository financial intermediation,” presumably on data handling and customer interaction through the Internet.

The electricity, gas, water and waste services spend $0.4 billion. But the electricity generation and supply spend is only $0.16 billion of this, 4% of mining or manufacturing R & D.

Source ABS

If we are going to boost the development of clean technologies then the development strength must be in manufacturing and mining. It is not to be found in the electricity supply businesses, although some of them own wind farms subsidized by the MRET scheme.

Does it matter whether there are fully developed businesses in Australia that extend from R and D all the way to sales and marketing? There are many branch offices of international corporations here and the statistics show that they spend as much as fully Australian owned companies.

The management of GM in Detroit clearly think that engineering and development at Fishermans Bend in Melbourne is a key asset of the corporation. Likewise in the high technology area, Varian Inc. has in Melbourne a major division for product development. You might conclude that the support for R and D goes to where it best supports the goals of the business with smart engineers, scientists and others. The only problem is how much of the benefit is captured for Australia.

So how would you approach spending $10 billion for the greater good?

The fundamental problem is that clean technology innovation is tax driven. Tax may drive innovation in the financial world but to supplant present energy sources you need lower cost alternatives or more economical ways of using energy. But a tax on carbon, like a window tax, will throw up some unusual technologies such as wind power, totally unsuited to supply base load power because of its intermittency. It is also costly for the management of the distribution of power through the grid.

When the MRET scheme is all over, there may be some very attractive engineering relics in the countryside but nothing to rival the end product of the sale of Papal Indulgences, arguably the carbon tax of its time, the building of St. Peters in Rome.

Of course the best development is natural, resting on the needs of customers. There may well be interesting uses for renewable or clean energy technologies in remote settings but these will not change general society behaviour and it may not give rise to a great new green business. There may be some freedom of action for the Clean Energy Finance Corporation as they may invest in technologies, inputs to these technologies and the use of the technologies.

• The investment in technologies might extend from start-up companies to financing demonstration pilot plants. If you are to spend $2 billion a year for 5 years then you would have to look at pilot plant financing otherwise you will be mired in many small opportunities, not to say that you should not pursue this small business activity. But there is a $1.6 billion Solar Flagship program from the Federal Government already in place.

• Inputs to clean technologies might actually be a place for innovation. Perhaps producing rare earth metals that are used in magnets or perhaps making defect free silicon for better semiconductor yields or better solar voltaic cells could be justified. But be wary of this. The collapse of Solyndra, a photocell manufacturer in California has left the US Federal Government $535 million worse off with a loan guarantee. Solyndra was unable to compete on pricing with Asian competitors. Manufacturing inputs to clean technologies has been tried in Victoria and Tasmania. Vestas, the Danish manufacturer of wind turbines, opened plants to make and assemble wind turbines in 2005 and closed them in 2007 with an estimated lost of $9 million. This was after a $10 million waver of import taxes by the Australian Government. Australia is not a low cost manufacturing country so there will be limited opportunities unless there is some natural advantage from minerals or people. This points towards financing multiple modest start-up businesses.

• The electricity supply industry is already utilizing both clean technologies and government subsidies. Financing small-scale plants is where a few $100 million is easily spent, particularly if it is other peoples’ money. But could proposals be mobilized within the 5 year timetable?

The reasoning for the creation of the Clean Energy Finance Corporation may well be found in a chapter in the Garnaut Climate Change Review of 2011 on “Low Emission Technologies and the Innovation Challenge,” where expenditure of $2-3 billion annually is recommended. Garnaut recommended increased basic research. This is not only the most expensive way of buying innovation but also, by its very nature, available to all and often not protectable as intellectual property.

The proposed corporation needs to be carefully looked at and then put down. Alas it unlikely that the panel of experts will suggest such a course of action. However a future Liberal Government has vowed to put it down.