Financing Energy Innovation in the Midwest

by Richard T. Stuebi

A few weeks ago, the Chicago Council on Global Affairs (CCGA) and NorTech collaborated to throw an event in Cleveland entitled “Financing the Midwest Energy Transition”.  I was asked to wrap up the session with some concluding remarks.  Normally, I don’t script out my talks, but for this occasion I did, and so I’m presenting my prepared comments on this topic as today’s blog post.

*   *   *

I’ve been working in Ohio for almost five years to help accelerate our region’s transition to an advanced energy economy.  My work has been driven by four considerations:

One, diversification.  Our transportation system in the Midwest is virtually entirely dependent upon oil, and our electricity supply is nearly 90% reliant on coal.

Two, environmental.  Obviously, we burn a lot of fossil fuels, and would benefit from reducing that burn.

Three, economic.  The prices we pay for fossil fuel energy are likely to rise as the supply-demand balance tightens — there are only finite quantities of these fuels, while demand continues to grow — and as environmental regulations tighten.

Fourth, also economic:  We see tremendous opportunity to create new industries in support of the future energy sector, employing thousands of people, based on our region’s inherent skills and advantages. 

About two years ago, I was pleased to be invited by the Chicago Council on Global Affairs to represent Ohio interests on a regional task force chartered to outline the energy challenges and imperatives facing the Midwest.  I am glad they asked me to join their effort because I have long felt that we in the Midwest — from Cleveland to Chicago, and all parts in between and surrounding us — need to work together to pursue our common opportunities and overcome our collective challenges.  

We in the Midwest can’t succeed as independent islands.

When the task force completed its report in June 2009, the CCGA held a great event in Chicago to present the findings.  I thought we should do something similar here in Cleveland – hence our collaboration to convene this event today.  But rather than covering the whole waterfront of issues relating to advanced energy, I thought we should focus on just one.

To me, the biggest one:  Capital.

Energy is an incredibly capital intensive industry, perhaps like no other.  A couple of years ago, the International Energy Agency estimated that about $1 trillion per year of capital will be required globally over the next 20 years to replace and/or extend the current asset base to meet growing demands for energy. 

And, that’s just for a status quo energy sector.

If we want to transition to an advanced energy economy, a host new technologies will have to be commercialized – and this commercialization process takes additional capital for R&D.  Lots of it.

I heard a speech given last week by the head of ARPA-E — DOE’s center for innovative energy R&D — in which it was said that the U.S. annually spends less on energy R&D than on potato chips, and less on electricity R&D than on dog food.

Obviously, this will have to change if the U.S. is to avoid being reliant on other countries to provide a reliable energy supply in a world constrained by dwindling fossil fuel supplies and tightening environmental pressures.

Where will this capital come from to build the new energy sector?

And, what should we be doing in the Midwest to address this capital challenge – both for global energy opportunities, and for the need to transform our own regional energy sector?

Those questions are the crux of what brings us here today.  Based on what we heard and discussed today, I’d like to offer some closing thoughts on future directions for us in the U.S. Midwest.

We know we’re not Wall Street, and we’re not Silicon Valley, but we do have important financial institutions that we need to leverage.  For instance, we have two Federal Reserve Bank branches – in Cleveland and Chicago – and we need to figure out a way to get them into this conversation about the energy transition.  We also have large commercial banks such as Key Bank (NYSE: KEY), many of whom have dedicated energy-related practices, and we want to see them become major players in advanced energy financing.

The corporate titans of the Midwest – both industrial giants and large utilities – can benefit from the advanced energy transition if they take proactive actions to prepare and gain competitive advantage.  They can create wealth and increase profits via new business lines.  They can also lose if they stay mired in the status quo and fight change.  We need to help these companies see the first perspective, and move off the latter perspective, as these corporates have large capital resources to put behind the energy transition.

With our collective universities – not to mention other institutions such as NASA’s Glenn Research Center, Argonne National Labs, Battelle and so on – the Midwest may be unparalleled in its research capabilities.  We need to help these institutions gain more and better access to DOE and NSF funding on energy-related topics. In turn, this requires that these universities make energy-related research a higher priority – and pick focal areas for them to become distinctive winners. 

These institutions, and other Midwestern parties that can’t pick up and move also need to start allocating some of their investment portfolios to local opportunities.  In particular, we need more Midwestern venture capital funding regional entrepreneurs and innovation. 

This is a particular passion of mine.  Early-stage venture capital is a local phenomenon, requiring a lot of interaction between investor and management.  But, as Frank Samuel has pointed out with his recent research at Brookings, we have a huge deficit in Midwestern venture capital — which translates to a huge deficit in Midwestern entrepreneurship.  While we might want to attract venture capital to the Midwest from outside the region, that capital is not likely to come from without if it’s not first coming from within. 

To start this process, states and municipalities with pension funds and other asset pools can and should require a percentage of their dollars to be deployed locally.  If they’re not willing to do this, then they’re not investing in their own futures.  In which case, I would say:  Shame on them.

And, though I’m a devout capitalist, yes, there is also a crucial role for government.  We need policies – at the local, state, and Federal level – that push us here in the Midwest towards the new energy future.  Both positive pressures (incentives/subsidies) and negative pressures (penalties and requirements) imposed by the government would shift capital towards the opportunities and the needs for new energy in the Midwest.

You’ll notice that, in all of the thoughts I’ve just expressed, I use the word “we”.

Well, who exactly is “we”? 

I think it’s us, here in this room, to start.  And, clearly, we need to expand the circle.

So, as you go home tonight, and to work tomorrow, be thinking about new actions you can take to expand the pool of energy capital flowing to our region.  Ask yourself the following two questions:

What did I learn today that might be able to make me or my organization a good return on investment?

And, who else do I know that should have been here today, but wasn’t?

Really think about answers to those questions, and then go forth and act upon them.  In so doing, let’s reclaim for the Midwest the leadership that made this region great in the mid 20th Century:  serious industriousness, innovation and wealth-creation to invent the economic system that enables the next phase of global prosperity and peace.

Richard T. Stuebi is a founding Principal at NorTech Energy Enterprise, where he is on loan as the Fellow for Energy and Environmental Advancement at the Cleveland Foundation.  He is also a Managing Director at the Cleveland-based venture capital firm Early Stage Partners, where he leads the firm’s cleantech investment activities.