United States Government Accountability Office GAO Report to Congressional Requesters January 2012 DEPARTMENT OF ENERGY Advanced Research Projects Agency- Energy Could Benefit from Information on Applicants’ Prior Funding GAO-12-112 January 2012 DEPARTMENT OF ENERGY Advanced Research Projects Agency-Energy Could Benefit from Information on Applicants' Prior Funding Highlights of GAO-12-112, a report to congressional requesters Why GAO Did This Study What GAO Found The Department of Energy’s (DOE) ARPA-E uses four selection criteria, such as the potential impact of the proposed Advanced Research Projects Agency- technology relative to the state of the art, and other considerations in awarding Energy's (ARPA-E) purpose is to funds. Other considerations include balancing a variety of technology overcome long-term and high-risk approaches and the likelihood the technology would be brought to market. GAO technological barriers in the identified 18 out of 121 award winners through ARPA-E’s first three funding development of energy technologies. rounds that had received some prior private sector investment, and ARPA-E took Since 2009, ARPA-E has awarded steps to identify and understand how this funding was related to proposed $521.7 million to universities, public projects. Beginning with the third funding round, ARPA-E began requiring that and private companies, and national applicants explain why private investors were not willing to fund proposed laboratories to fund energy research projects. However, ARPA-E did not provide applicants with guidance, such as a projects. sample response, to assist them in completing this requirement, and responses GAO was asked to examine were generally limited. Some applicants provided general information about prior (1) ARPA-E’s use of criteria and other research but did not specifically explain why private investors would not support considerations for making awards and their projects. When applicants provided little prior funding information, ARPA-E’s the extent to which applicants identify program directors spent time and resources to determine the extent of such and explain other private funding funding for proposed ARPA-E projects. One applicant included a letter from its information, (2) the extent to which venture capital investor to explain why the investor was not willing to fund the ARPA-E-type projects could have been work proposed to ARPA-E, an approach the National Institute of Standards and funded through the private sector, and Technology uses as a check in its funding applications for advanced research but (3) the extent to which ARPA-E that ARPA-E currently does not use. Also, ARPA-E officials said that they have coordinates with other DOE program considered but have not used venture capital data to identify applicants with prior offices to avoid duplicating efforts. private investors. Examining such data allowed GAO to quickly cross-check GAO interviewed ARPA-E program applicants’ prior private funding. directors, award winners, and nonwinners with characteristics similar GAO’s review suggests that most ARPA-E projects could not have been funded to those of award winners. GAO also solely by private investors. Private venture capital firms told GAO that, among analyzed private venture capital other considerations, they generally do not fund projects that rely on unproven funding data and spoke with venture technologies and tend to invest in projects that can be commercialized in less capital firms. than 3 years. Data from ARPA-E on award winners show that 91 out of 121 What GAO Recommends ARPA-E projects from the first three funding rounds had technological concepts that had not yet been proven in a laboratory setting. Also, nearly all of the ARPA- GAO recommends that ARPA-E E award winners and applicants GAO spoke with estimated that their projects consider providing applicants guidance were at least 3 years away from potential commercialization. In addition, GAO with a sample response explaining found that few eligible applicants that were not selected for an award later prior sources of funding, requiring secured private funding. applicants to provide letters from investors explaining why they are not ARPA-E officials have taken steps to coordinate with other DOE offices to avoid willing to fund proposed projects, and duplication. For example, ARPA-E program directors told GAO they engage in using third-party venture capital data to outreach with officials from related DOE offices in advance of funding identify applicants' prior funding. announcements to identify funding gaps in research. In addition, program ARPA-E commented on a draft of this directors have recruited officials from other DOE offices and the Department of report and concurred with key findings Defense (DOD) to review ARPA-E applications. This cross-agency interaction and recommendations. may also reduce the potential for overlap in funding. View GAO-12-112 or key components. For more information, contact Frank Rusco at (202) 512-3841 or [email protected]. United States Government Accountability Office Contents Letter 1 Background 5 In Addition to Its Selection Criteria, ARPA-E Also Considers Applicants’ Prior Sources of Private Funding; However, Most Award Winners We Reviewed Did Not Explain This Information 10 Most ARPA-E Projects Likely Could Not Have Been Funded Solely by Private Investors 14 ARPA-E Officials Have Taken Steps to Coordinate with Other Department of Energy Offices in Advance of Awarding Funds 19 Conclusions 21 Recommendations for Executive Action 22 Agency Comments and Our Evaluation 22 Appendix I Scope and Methodology 24 Appendix II ARPA-E Program Technology Areas 28 Appendix III Description of ARPA-E Award Winners with Prior Private Investment 31 Appendix IV Comments from ARPA-E 34 Appendix V GAO Contact and Staff Acknowledgments 36 Table Table 1: ARPA-E Funding Announcement Program Technology Areas 9 Figures Figure 1: ARPA-E’s Described Role within DOE and the Private Sector 6 Figure 2: Current Battery Range for Electric Vehicles and Goals of ARPA-E Research 7 Page i GAO-12-112 ARPA-E Abbreviations ADEPT Agile Delivery of Electrical Power Technology America America Creating Opportunities to COMPETES Meaningfully Promote Excellence in Act Technology, Education, and Science Act ARPA-E Advanced Research Projects Agency-Energy BEEST Batteries for Electrical Energy Storage in Transportation BEETIT Building Energy Efficiency Through Innovative Thermodevices DARPA Defense Advanced Research Projects Agency DOD Department of Defense DOE Department of Energy EERE Office of Energy Efficiency and Renewable Energy GENI Green Electricity Network Integration GRIDS Grid-Scale Rampable Intermittent Dispatchable Storage HEATS High Energy Advanced Thermal Storage HVAC heating, ventilating, and air conditioning IMPACCT Innovative Materials and Processes for Advanced Carbon Capture Technologies NIST National Institute of Standards and Technology NVCA National Venture Capital Association PASTA Panel of Senior Technical Advisors PETRO Plants Engineered To Replace Oil REACT Rare Earth Alternatives in Critical Technologies for Energy PHEV plug-in hybrid electric vehicle SBIR Small Business Innovation Research TRL technology readiness level This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Page ii GAO-12-112 ARPA-E United States Government Accountability Office Washington, DC 20548 January 13, 2012 The Honorable Ralph M. Hall Chairman Committee on Science, Space, and Technology House of Representatives The Honorable Paul Broun, M.D. Chairman Subcommittee on Investigations and Oversight Committee on Science, Space, and Technology House of Representatives U.S. energy consumption has increased by 20 percent over the past 20 years and is projected to continue to grow.1 Volatile prices, global supply disruptions, and the impacts of energy use on climate and the environment have driven interest in reducing energy demand, improving energy efficiency, and expanding supplies with both renewable and traditional energy sources. In 2005, members of Congress asked the National Academies what actions federal policymakers could take to enhance the nation’s science and technology enterprise so that the United States could successfully compete, prosper, and be secure in the global community of the 21st century.2 The National Academies compiled their findings and recommendations in a report that identified two key challenges: (1) creating high-quality jobs for Americans, and (2) responding to the nation’s need for clean, affordable, and reliable energy.3 The report also highlighted the idea that scientific and technical innovations are key drivers of economic growth in the United States. Among the report’s recommendations was the creation of an organization within DOE to sponsor energy research that industry by itself cannot or 1U.S. Energy Information Administration, Annual Energy Review 2009. (Washington, D.C.: 2009). 2The National Academies comprise four organizations: the National Academy of Sciences, the National Academy of Engineering, the Institute of Medicine, and the National Research Council; they advise policymakers on scientific and technical matters. 3The National Academies, Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future (Washington, D.C.; 2007). Page 1 GAO-12-112 ARPA-E will not support and in which risk may be high but success would provide dramatic benefits for the nation in meeting long-term energy challenges. In 2007, the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act (America COMPETES) established the Advanced Research Projects Agency- Energy (ARPA-E) within the Department of Energy (DOE) to overcome the long-term and high-risk technological barriers in the development of energy technologies.4 ARPA-E borrows from the Defense Advanced Research Projects Agency (DARPA) model, an agency created within the Department of Defense (DOD) in 1958 to direct and perform advanced research and development projects. As specified in statute, ARPA-E’s program goals are to enhance U.S. economic and energy security through the development of certain energy technologies and to ensure that the United States maintains a technological lead in developing and deploying advanced energy technologies. Since first receiving an appropriation in 2009 in the American Recovery and Reinvestment Act of 2009, ARPA-E has awarded $521.7 million to universities, public and private companies, and national laboratories to fund 181 projects that attempt to make transformational—rather than incremental––advances to a variety of energy technologies, including high-energy batteries and renewable fuels.5 Award winners must meet cost share requirements, through either in-kind contributions or outside funding sources.6 ARPA-E is required by statute to achieve its goals through energy technology projects that, among other things, accelerate transformational technological advances in areas that industry by itself is not likely to 4Pub. L. No. 110-69, § 5012 (2007). 5ARPA-E generally uses cooperative agreements to make funding awards, which involve the transfer of a thing of value to the recipient to carry out a public purpose authorized by law. Cooperative agreements differ from grants because substantial involvement is expected between ARPA-E and the recipient. ARPA-E uses similar funding agreements for national laboratories. 6The cost share requirement for award winners is generally at least 20 percent of total allowable costs, although under section 988(b)(3) of the Energy Policy Act of 2005, ARPA- E has reduced the cost share requirement for certain applicants, such as universities, to 5 percent or 10 percent for all of the funding rounds except the first. Award winners’ cost share must be provided by a nonfederal source. Page 2 GAO-12-112 ARPA-E undertake because of technical and financial uncertainty. At the same time, the Director of ARPA-E is required to ensure, to the maximum extent practicable, that ARPA-E’s activities are coordinated with, and do not duplicate the efforts of, programs and laboratories within DOE and other relevant research agencies. This report responds to your request that we examine ARPA-E awards. Our objectives were to examine (1) ARPA-E’s use of criteria and other considerations for making awards, and the extent to which applicants identify and explain other private funding information; (2) the extent to which ARPA-E-type projects could have been funded through the private sector; and (3) the extent to which ARPA-E coordinates with other DOE program offices to avoid duplicating efforts. To address these three objectives, we reviewed ARPA-E applications and conducted interviews with applicants, award winners, representatives of venture capital firms and other experts, and DOE and other federal agency officials. ARPA-E has released a total of four funding announcements—meaning the agency was accepting project proposals for a set period of time—in April 2009, December 2009, March 2010, and April 2011. Our review focused on ARPA-E’s first three funding rounds, which had closed prior to the start of our review. The fourth funding round did not close until September 2011.7 ARPA-E awarded funds for 121 projects out of 4,788 applicants across the three funding rounds we examined. To address these three objectives, we reviewed ARPA-E applications and conducted interviews with applicants, award winners, DOE officials, and representatives of venture capital firms, among other activities. Specifically, • To examine ARPA-E’s use of criteria and other considerations for making awards, we selected a nonprobability sample of 20 applications from the 4,788 applications in the first three funding rounds and reviewed these 20 applications. To examine the extent to which applicants identify and explain other private funding information, we searched for evidence of prior private funding for all 121 award 7In the fourth round of funding, ARPA-E awarded 60 projects out of 427 applicants. Page 3 GAO-12-112 ARPA-E winners in VentureDeal, a venture capital database.8 As a result of our search, we identified 18 award winners that had some prior private venture capital funding from the 121 award winners. We then reviewed the applications of these 18 award winners and interviewed their representatives.9 • To analyze the extent to which ARPA-E projects could have been funded through the private sector, we analyzed data on the state of technology and potential time to commercialization for the 121 award winners from ARPA-E’s first three funding rounds. In addition to analyzing data for the 121 award winners, we conducted structured interviews with 22 of 33 “contingently selected” applicants chosen by ARPA-E during its second and third funding rounds. Contingently selected applicants are those applicants that met ARPA-E’s selection criteria but were ultimately not awarded funds.10 We also conducted structured interviews with a nonprobability sample of 13 award winners selected from ARPA-E’s first three funding rounds and we spoke with the 18 ARPA-E award winners mentioned above that we identified through the VentureDeal database to discuss key differences between their prior research and their ARPA-E-funded projects.11 We also conducted interviews with a variety of companies and individuals knowledgeable about research associated with ARPA- E-type projects, including six venture capital firms. • To examine the extent to which ARPA-E coordinates with other DOE programs to avoid duplicating efforts, we spoke with the ARPA-E program directors as well as officials from other DOE program offices, DARPA, and the DOE Office of Inspector General. We also asked 8We were not able to verify the completeness of VentureDeal data, and there may have been ARPA-E award winners that had prior private funding that did not appear in these data. To compile data on venture capital funding, VentureDeal uses (1) Securities and Exchange Commission regulatory filings, (2) survey information collected directly from venture capital firms, (3) financial news media announcements and press releases from venture capital firms or recipient companies, and (4) local business journals. 9Eight of these 18 companies also appeared in the sample of 20 applicants that we selected to examine ARPA-E's use of criteria and other considerations for making awards. 10According to ARPA-E officials with whom we spoke, these applicants would have been selected for an award had additional funds been available. The remaining 11 contingently selected applicants did not respond to our requests for an interview. 11Four of these 18 award winners also appeared in our nonprobability sample of 13 award winners. Page 4 GAO-12-112 ARPA-E award winners and contingently selected applicants to discuss their understanding of other potential sources of DOE funding for their projects. We provide a more in-depth discussion of our methods in appendix I. We conducted this performance audit from November 2010 to December 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Background In 2005, the National Academies recommended to Congress the creation of an organization within DOE like DARPA. In 2007, the America COMPETES Act created a new agency within DOE called ARPA-E. In line with the National Academies’ recommendation, the America COMPETES Act as amended directs ARPA-E to achieve its goals by identifying and promoting revolutionary advances in fundamental and applied sciences, translating scientific discoveries and cutting-edge inventions into technological innovations, and accelerating transformational technological advances in areas that industry by itself is not likely to undertake because of technical and financial uncertainty. As such, ARPA-E officials told us that ARPA-E was designed to sponsor research beyond basic science, yet riskier than what the private sector alone or DOE’s applied offices would support.12 (See fig. 1.) The National Academies recommended that ARPA-E should not perform research and development itself, but should fund it to be conducted by universities and others in the private sector. In 2009, the American Recovery and Reinvestment Act of 2009 appropriated $400 million for ARPA-E. 12DOE funds the development of energy technologies ranging from basic and applied energy research to loan guarantees for clean energy generation facilities. For example, DOE’s Office of Science supports basic scientific research, including chemistry, biology, and materials sciences, as foundational research for a number of energy technologies. DOE’s Office of Energy Efficiency and Renewable Energy applies established research to alternative and clean energy technologies, such as improving existing lithium ion batteries for use in electric or hybrid vehicles. DOE’s Loan Programs Office offers loans to commercialize clean energy projects, such as wind farms. Page 5 GAO-12-112 ARPA-E Figure 1: ARPA-E’s Described Role within DOE and the Private Sector Note: Private sector groups are in oval boxes and DOE offices are in rectangular boxes. According to ARPA-E officials, higher-risk research is less likely to be successful in being brought to market but may have greater potential benefits in increasing energy supplies and creating jobs. Technology readiness levels are used by DOE to categorize research according to its proximity to basic science or large-scale deployment. ARPA-E is an agency with fewer than 30 federal employees, and its eight program directors, who are generally scientists and engineers, create and manage funding programs for the agency. ARPA-E’s program development and award selection process takes 6 to 8 months from start to finish, beginning when the agency hires a program director for a 3-year term and tasks the program director with identifying a gap in energy technology research and developing a program to fill that gap. For example, ARPA-E’s batteries for transportation program, called the Batteries for Electrical Energy Storage in Transportation (BEEST) program, was established to fill a gap in existing federal research programs on batteries for electric vehicles. Identifying these gaps and designing the program involves research; consultation with scientific experts, including a workshop with outside experts; and internal discussion at ARPA-E. From this process, program directors develop funding announcements that describe the technical requirements specific to each program’s technology area that applicants Page 6 GAO-12-112 ARPA-E