ARPA-E: Versatile Catalyst for U.S. Energy Innovation

The innovation resources of the United States are vast. The nation is blessed with extraordinary human capital, dynamic companies, creative research institutions, and great wealth. Its legal and institutional frameworks have enabled the launching of some of the world’s most important industries in recent decades. But in energy, including next-generation non-fossil-fuel energy, one of the defining sectors of the 21st century, this country’s innovation achievements have fallen far short of their potential. Institutional innovation is required to unlock this potential and usher in an era of better and cheaper energy.

The Advanced Research Projects Agency – Energy (ARPA-E) is an important new institution that has begun to demonstrate its value as a versatile catalyst of energy innovation. Created by Congress in 2007, and funded for the first time in 2009, ARPA-E more effectively generates new ideas that are useful to energy innovators than its older brethren in the federal R&D establishment, and it bridges the gap between research and use in ways that these other agencies simply do not. As of February 2017, for instance, 580 ARPA-E project teams, which received a total of approximately $1.5 billion from the agency, had formed 56 new companies and raised more than $1.8 billion in private-sector follow-on funding to continue to advance new technology toward the market.

These results warrant sustaining and expanding ARPA-E and infusing some of the practices that have made it so effective into other federal R&D funding agencies. Yet, the Trump administration has proposed to shut it down instead, on the grounds that “the private sector is better positioned to finance energy R&D and to commercialize innovative technologies.” Although the Senate Energy and Water Appropriations Subcommittee “definitively rejected this short-sighted proposal” and appears poised to save ARPA-E from the budget axe in fiscal 2018, the fact that such a rescue was necessary suggests that ARPA-E’s approach and its achievements deserve to be better understood beyond the boundaries of the technical communities with which it works on a daily basis.

This report explains why ARPA-E is needed, what it does, and how it has helped the nation make progress toward important goals. We rely heavily on research done by others, particularly the recent National Academies’ Assessment of ARPA-E. We also bring new evidence to the table to refute the claim made by the administration and its allies that the private sector would step in to support ARPA-E projects if the agency were to be zeroed out. Our analysis of early stage private investment in clean energy startups shows that this claim is inaccurate. The data support statements made by project leaders and analysts, such as the Government Accountability Office as well as the Academies’ committee, that ARPA-E funding complements, rather than crowds out, private funding. In particular, we show that firms funded by ARPA-E raise more private capital than other clean energy startup firms and have particularly high odds of being in the top 10 percent of the fundraising distribution. We argue that ARPA-E funding helps firms become much better candidates for follow-on private support. Cutting ARPA-E would impede the unlocking of the nation’s innovation resources to tackle urgent problems of energy supply, management, and use.

We conclude that:

• ARPA-E’s operational autonomy and distinctive operating procedures should be maintained. Although consultation and collaboration between ARPA-E and the rest of DOE should be encouraged, efforts by DOE headquarters and senior management to exert greater control over ARPA-E should be resisted.
• ARPA-E’s budget should be expanded. There are many more “white spaces” in energy technology that have not been explored, and the impressive responses to ARPA-E solicitations suggest that there is no shortage of potential innovators.
• ARPA-E should be reauthorized. Reauthorization would send a strong signal that ARPA-E’s autonomy should be maintained and lay the groundwork for expanding its budget.
• An ARPA-E trust fund should be established with royalties from oil and gas production on federal lands. In an era of federal constraint, such a fund would provide stability and certainty for the agency.
• ARPA-E practices should be infused into the rest of DOE. Adoption of appropriate elements of the ARPA-E model would improve the performance of DOE’s famously byzantine bureaucracy.

This report begins by establishing the need for ARPA-E. It explains briefly why innovation that leads to cheaper, cleaner energy is needed and why neither markets nor the rest of the federal energy innovation support system provide enough of it. We then describe the distinctive operating procedures and culture that ARPA-E has established in its eight years of existence. The final two major sections provide evidence that ARPA-E is working. The first focuses on its ability to support the formulation of novel concepts as expressed in scientific and technical publications and patents. The second focuses on how ARPA-E nurtures ideas to the point where private investors see the potential profit in them and commit their own capital. We analyze investment data to show that ARPA-E complements, rather than substitutes for, private investment. ARPA-E funding allows companies to become good candidates for private investment. We close by elaborating on the recommendations summarized above.