DOE Investments Pay Off

February 15, 2011

In 2009, the U.S. Department of Energy (DOE) received $400 million, through the American Recovery and Reinvestment Act, to create the Advanced Research Projects Agency—Energy (ARPA-E) program. The goal of the program was to identify clean-energy research projects deemed too radical or too preliminary to attract private financing

ARPA-E initially awarded a total of $151 million in grant money to a list of thirty-seven clean-energy projects with a focus on disruptive new technologies. The six initial projects now have leveraged $108 million in private, venture-capital (VC) funding. This means that for every ARPA-E dollar invested in these six projects, private venture capital firms invested approximately four dollars. Most ARPA-E projects still are several years from producing a commercial product.

According to Josh Lerner, a professor at the Harvard Business School and an expert on venture capital, the fact that the remaining 31 of the initial projects have not yet attracted outside, private investment is not troublesome. He argued that if all of the projects quickly had elicited private investment, it would have indicated that the program had selected projects that likely would have received funding without the DOE’s assistance. Lerner contended that, given that six of the initial 37 projects had received private investment, it was “hard not to feel it’s a reasonable indicator that they’re doing something right.”

Despite this track record, the outlook for ARPA-E remains murky. It has awarded, to 121 different projects, $363 million of its initial $400 million allocation and has not received any additional funding since 2009.

Program administrators have been unable to fund any new projects since July 2010 and have funded only a fraction of the projects that they deemed “qualified” for funding.  ARPA-E recently posted on its website an “Encouraged Applicants” list of projects that completed ARPA-E’s full application and scientific-review process but needed private investors to continue.

While some proponents of the program have called for the government to take an equity stake in the companies, as it did with G.M. and A.I.G., instead of simply providing grant money, some critics have argued for entirely defunding the program. They claim that this type of funding is better left to the private sector, which they argue is better at selecting technologies with long-term commercial viability.

The 2012 budget proposal recently released by the administration of President Barack Obama called for an additional investment of $550 million in the program.

For more information on the ARPA-E program and affiliated companies, please click here.