Renewable energy: The carrot and the stick

Consultant Susan Ward (ITECS Innovative Consulting (New Smyrna Beach, Fla.) says U.S. government funding for new composites technology projects is still out there, if a company has the right project, presented with the right strategy, to the right government agency.

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Energy efficiency. Job creation. Alternative fuels. These aren’t just buzzwords. They are, in fact, the drivers behind key government initiatives that have generated unprecedented funding for companies. Fisker Automotive, for example, recently received a $528.7 million (USD) loan from the U.S. Department of Energy (DoE) for the development and production of two lines of composites-intensive, plug-in, hybrid-electric vehicles. And a year ago, the Obama Administration announced $2.4 billion in grants to car companies and battery makers, setting the course for U.S. manufacturers to build next-generation batteries for hybrid and plug-in electric cars.

There are still hundreds of millions of dollars yet to be awarded. The funding is out there if a company has the right project, presented with the right strategy, to the right government agency.

A shifting paradigm

In the past 15 years, there has been a significant shift in the way U.S. federal government research is funded and government agencies go about procurement.

The earliest and most prominent example is in the civilian aerospace realm, where NASA turned to very large businesses, such as Lockheed Martin, to meet its space launch hardware needs. Today, the government is doing something similar to bolster the development of sustainable forms of energy. The impetus is cost; if you take a $20/gal barrel of fossil fuel and transport it to Afghanistan for use by U.S. armed forces, the actual cost is about $600/gal. For that reason, a $10/barrel increase in the price of crude oil increases U.S. Department of Defense (DoD) expenses by $1.3 billion per year.

If it had not been for the global recession, the world was on track to use twice the amount of fuel in 2050 as it did in 2007. A large part of that increase is attributable to China and India, which are both growing economically at a yearly rate of 8 to 10 percent. To make matters worse, the largest energy consumers are the U.S., China and Japan — three countries with collectively poor access to oil reserves. Today, energy really moves the whole world. For that reason, a major emphasis of the American Recovery and Reinvestment Act of 2009 is funding for energy development of all kinds.

Unlike the defense industry, there are no large alternative energy companies. We do not see large companies forming around the alternative energy market as they did around fossil fuels. Solutions to our energy problems are diverse (wind, solar, bio-mass and the like), and many companies, large and small, are looking into alternative energy. The government is trying to discern what resources within these companies could be redirected toward energy solutions. For example, a chemical company could turn its chemistry expertise to the development of something for solar energy, but it wouldn’t necessarily be responsible for the entire product.

Government vs. university

Many more businesses now get money once reserved for government research laboratories. Today, the U.S. federal government spends $160 billion per annum on research, but only 40 percent of that money stays within the national laboratory system. Sixty percent of it now goes to businesses and universities. Moreover, businesses can access technologies developed in a government lab through a Cooperative Research and Development Agreement (CRADA) under which a government lab and a business work in parallel, with no money changing hands. If the result of the parallel effort is promising, the government then will take the next step and help fund commercialization.

It’s good for businesses because they have a whole new market that they can get into, and it’s a win for the government because the businesses have proven the technologies and made them commercial-ready. The latter is particularly important because government agencies deal with taxpayer dollars. DoD technology, for example, must be perceived not only as useful in the international security context, but it also must be transferable into the commercial world to create or expand markets and generate jobs.

Unfortunately, most businesses outside the military sector are more familiar with the university research world. Few stop to think about what technology might be found in a government lab that could be leveraged into a new solution for a market. But university technology transfers are awarded based on how much money they’ll bring in. The university’s goal in tech transfers is to raise money to support its operations. By contrast, a government agency’s goal is to get the technology commercialized. Funding awards, in fact, can be enormous, and agencies often will part with lab-bred technology at a lower cost and with fewer obligations or restrictions than those imposed by universities.

The carrot and the stick

The government is seeking to attract businesses into the alternative energy market with a classic carrot-and-stick approach. Carrots are necessary because no alternative, to date, is as cost-competitive as fossil fuel. So government incentives have been put in place in the form of legislation, procurement mandates and tax incentives. The big carrots, of course, are government research funds and government procurement contracts. The American Recovery and Reinvestment Act of 2009 includes a huge stimulus package for sustainability. Congress increased government funding of renewable energy projects by 600 percent. Although the federal government traditionally spends about $400 billion on procurement each year, under the stimulus package that figure climbed to $1 trillion.

Further, U.S. states have been given stimulus money that they must disperse in the form of energy-saving capital grants. These can make a manufacturing process more energy efficient or go to something as mundane as installing a more efficient heater. Grants have ranged from $400,000 to $1.5 million. Companies that provide the energy-saving products that can be purchased with these funds can contact state governments and get connected with grant seekers.

The bottom line is this: If a business wants a piece of the market but isn’t working with the government, it is making a serious mistake. In the same way that it defined the market for aerospace, the government is now defining the market for alternative energy. It will be a huge buyer in the market. Federal agencies will issue product specifications. Anyone who wants to be “in,” therefore, has to look at what the government has decided to buy. Those who don’t seek government aid cannot survive financially. When the stimulus package provided $2.2 billion for battery manufacturing for lightweight vehicles, the DoE was giving out awards between $60 million and $150 million to build plants. A company that didn’t go after that money simply couldn’t compete.

Beyond the carrot, there is the stick. In the ground transportation market — a target market for composites professionals right now — that stick is the new U.S. Corporate Average Fuel Economy (CAFE) standards. The government also has established six green mandates for its procurement contracts. For one, it has mandated that every federal building be retrofitted with green technology by 2015. Companies that have building products certified under the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEEDS) program ought to be applying for funds. And at some point, legislation likely will curtail CO2 emissions through cap-and-trade or other legal mechanisms. Companies that can provide solutions that comply with these inevitable regulations are of great interest to those who control government funding decisions.

Grasping the carrot

Access to research funding or procurement contracts, however, isn’t easy. Companies that want access must take the following steps:

Step 1: Identify opportunities. What is the government putting its money on? Agencies publish “road maps” that outline where they’re headed, technologically. Each has a track record that indicates the general direction of its priorities. Those trends are not hard to discern. At the recent SPE Automotive Composites Conference and Exhibition (Sept. 15-16, 2010), for example, many carbon fiber suppliers openly predicted that in four or five years, their sales to the aerospace market, which is growing fast, will nevertheless be eclipsed by activity in the wind energy and automotive markets.

Step 2: Market your company. A business must sell itself and its capabilities to the funding agencies to find out if the agencies are interested in its technology. This is a very important step, in part, because it will be a source of valuable information. Among those who disperse stimulus funds, there is a remarkable openness. If a firm submits a plan that looks good to an agency, the agency’s decision makers will tell the applicant a great deal about the market and even suggest potential technology partners.

Step 3: Substantiate capabilities. This is a tremendous challenge. A big question the government will ask is Can you commercialize quickly enough? Look at partnering with others to go after the money. Can your company form a coalition or a collaborative group that brings the whole value chain together? A collaborative group can present a very attractive implementation plan to a government agency.

Step 4: Proposal writing and lobbying. Under normal circumstances I would recommend that you take a proactive rather than a reactive approach. That is, be selective about which agencies you approach, and attempt to develop long-term relationships with the decision makers. However, with stimulus funds, it has become a numbers game. I’ve found it advantageous to take a reactive approach and submit proposals to any likely funding source. It’s also prudent to target your appeals for funding to the end of an agency’s fiscal year. Each department has money that must be spent, or that sum will not be budgeted the next year. Proposals that come in when the fiscal-year deadlines approach will be received more warmly.

Step 5: Contract management. If a contract is awarded, your business must set up an accounting system adequate to the task of documenting, to the government’s satisfaction, how the former handles the latter’s money. Management tasks also include ensuring that the company’s intellectual property is well protected and that employees are thoroughly educated about the company’s legal obligations under the contract.

Last, but certainly not least, seek and be willing to pay for professional help with all five steps. Large companies are accustomed to doing this, but small companies often are reluctant to spend the money, even though they are permitted to do so by the government agency. This is particularly important for proposal writing, lobbying and contract management. If you’re writing a proposal for the DoE and you want to be successful, you need people who understand the DoE to help you write it. That is no less true when dealing with elected officials. There also are professionals who specialize in all aspects of contract management.

Although it can be frustrating to work with the government, a company that wants to succeed in the alternative-energy realm and the markets, such as automotive, on which energy mandates have an impact has little choice but to seek government aid.

Those who attempt to develop sustainability-related products on their own will suffer defeat by those who are willing to pay for the professional help they need to gain access to research funds or procurement contracts and/or partner with other firms to commercialize a product in a timely manner.

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