Former ARPA-E Head Cheryl Martin’s Outlook on the Industry

Cheryl Martin, the former acting director of the Advanced Research Projects Agency — Energy (ARPA-E), founded Harwich Partners LLC earlier this year, aiming to work with both the public and private sector on energy technology adoption. She’s also a non-resident fellow at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs, where she focuses on the innovation, finance, regulatory and policy dynamics needed to accelerate the adoption of new energy technologies in the global market. Since April, she has been assisting The New York State Energy Research and Development Authority (NYSERDA) in developing new business models and partnerships for New York’s Reforming the Energy Vision (REV) strategy.

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Martin has also spent time in her career at Kleiner Perkins Caufield and Byers, as well as 20 years at chemicals manufacturer Rohm and Haas. We sat down with her recently and asked for her thoughts on where she sees the cleantech industry, and its financing, going. Here’s an edited transcript of her comments.

Tell us about your time at ARPA-E.

I adored my job at ARPAE. I thought being able to help with the front end of the pipe, and to be able to think about how the government can be catalytic and accelerative, were really, really important. The main thing I joined ARPA-E for, and what I think we did a good establishing, is taking really out-of-the-box approaches to technology — taking things that people think might be impossible, and getting it to be plausible, and start tipping towards the inevitable.

At ARPA-E, we could get to the first prototype, which was awesome. Some of the things that people thought were impossible, we were able to get to the fact that they truly can exist. We could see it, we could actually think about what what it would really look like scaled up.

But we really were constrained at ARPA-E. The agency couldn’t go further than that by mandate.

What are you focusing on now that you’ve left ARPA-E?

I’ve been really excited over the past several years to see financial markets come in to things like solar and wind development projects. These are projects that were crazy a few years ago; people just weren’t going to invest in those. But now, people are coming in and the cost of capital is coming down.

So one of the things I wanted to focus on coming out of ARPA-E is how can we get the middle of the pipe to work better. How do we get first demonstrations, pilot plants, the first bit of scale up before you get into growth capital. How do we get those working better?

That has kind of been my personal mission: thinking about how I can help with that.

I’m a person who turns knobs for a living; that is always what I’ve done in my career. So at some point I think I will go run something, but in the short term, there are a lot of things worth thinking about. Where are there opportunities to open up markets? What about financing the middle stage? How do we reduce the risk? How do we think about different types of capital?

So what kinds of things have you been working on recently?

The New York REV Demonstration projects, like the ones I’ve been consulting on in the state of New York, are really about demonstrating new business models. How and why are the utility and its partners creating new revenue streams for each other and new value for customers. It’s very customer-centric. And in doing so, can we witness a transformation of the utility industry? This has happened in other sectors, and, in doing so, do we open up innovation and capital more than it has been in the past. So you can see that it fits back to my interest, but in a very different way. But the conversations have been very similar: What does it mean for a utility to shift from being rewarded and earn revenue based on assets and a fixed return in a regulated environment, to having partners opening up markets. It’s about different business models, different ways of framing the problem.

A lot about what we talked about [at ARPA-E] with our very early stage companies was things like who would want to take this, what value are you going to provide? So it has been really exciting working with the utilities, talking to both large and small companies, about how and why they feel that what they are doing can open up a market and create value that really hasn’t been unlocked before.

What new clean technologies have the most potential for adoption and financing?

I think we’re going to see really interesting opportunities for changing the way energy efficiency is adopted and promoted and embraced and financed by some of these REV demonstrations. That’s pretty cool. That covers a really wide sweep.

And the whole idea of grid efficiency, grid management, distributed generation embracing storage — all of that starts to come together.  At least for me, at ARPA-E, we didn’t think about things very often by single technologies, we thought about it as solution sets. So, many times, controls can do some things and manage load as well as, and in some places better than, storage. But then there are places where storage itself is going to be the better answer. And in some cases, using them in concert is going to be the smartest, lowest cost solution because of the value it can attain. And that’s going to get the best funding.

I can see very interesting opportunities coming, and you start to think something like, say, ‘How do we animate electrical vehicle markets in the state of New York? Is there a role for the batteries themselves, or the vehicles themselves in both urban and campus settings, different than what we’ve done before?’ Those are ones that I think we will see people thinking about. I don’t think we will see them in the first filings. But we are excited about those.

Honestly, other than liquid fuels, I think almost anything is going to benefit from the business models at the utilities themselves opening up. There are so many things here. When you get to pure liquid fuels transportation, it’s not as obvious.  But the Demonstrations themselves — that’s Demonstrations with a big D — are about business model demonstration. And I think, as we get these business models being demonstrated, the next generations of technologies will be able to slot in.

We may see demonstrations that are a little bit suboptimal — somebody’s battery system isn’t quite at the cost they need, for example. But the costs are tumbling so fast in storage, you can say, ‘If it works, and if batteries get to this price point, we would scale.’ And that’s allowed. People are allowed to identify cost barriers and things that may be true in the future. You don’t want to just constrain to today for something that people see as really important and exciting.

What’s your vision for your new firm, Harwich Partners?

I have had a lot of conversations trying to assess, from a lot of different perspectives, the question: What’s the gap? And then exploring some different ways to fill that gap. I think it won’t be one answer. I think part of it is helping to assist folks trying to open up markets like this whole REV demo piece. I think it’s also looking at some subsectors of energy where perhaps sharing in platforms for development might allow us to diffuse the risk among some companies who see a common benefit.

Then there are some broader questions about different types of funding models that I have seen some interest in. So, I never say never about a fund being in the future. But it needs a lot more study about what exact role it would serve. But a lot of folks are saying, yeah, there are gaps here. We are seeing some of them, the whole conversation with CREO and all the philanthropic foundations and family offices trying to see if there is a place where they fit in this conversation.

I think that, if we open ourselves up to say there are a number of things that need to happen, then I think we are more likely to come up with a menu of things. Some of them I might choose personally to do, some of them I might just help seed getting done. Some of it is just simply connecting people more efficiently.

There are plenty of places that have existing instruments for connections or problems that already have solutions where we’ve got to connect people and its just silos that get in our way. And having at least the breadth of perspective from ARPA-E and that broad network, is, how can I help people see what is going on in certain parts of the country, or accelerators and some of that connection as well.

You’re focusing on pilot projects. Is that too small for banks to come in and take part?

They fit a different risk profile than the standard. Those early projects are just past ARPA-E. And some of the capacity today does come from other government agencies, like the Department of Energy or Department of Defense. So again, that’s not inappropriate. But I do think more diversity of capital or supplemental capital or efficient use of that capital is really a key thing that I want to focus on.

Talk to me about the role you see for VC’s playing in “middle of the pipe” projects. 

I do think there’s room in that space for people like Black Coral Capital’s Rob Day, people with deep expertise and who know how to tease those projects out. They’re small. It’s not a class of finance at this point because each one is pretty small. But I think those are good.

I think there continues to be appetite in storage, as there seems to be more and more demand for it. People are seeing costs coming down, and certainly people have been getting financing in those spaces. Some of the storage guys have managed to get small amounts of financing to move themselves ahead, or demonstration projects.

I think what we’re seeing more and more is partnerships. Like Primus Power, which is ARPA-E funded, partnered with Raytheon. I think they’re actually continuing to deliver on their projects into some places in the Pacific Northwest, and Miramar in San Diego and a few other places. They just got a sign off on their performance from NREL. So we’re seeing the wheels turn and start to move some of those projects forward.

Or look at a company like Fluidic Energy [rechargeable zinc-air batteries]. They got the cost and cycle life right in going after the cell phone tower industry outside the U.S., for backup power.

So I’m excited about what we are seeing in storage from the costs coming down and the number of demonstrations being done, but we are still on a learning curve. Exactly what type of chemistries and what type of performance attributes is still a TBD. So, I’m sure we are not out of the woods yet. I doubt its all growth capital, I’m sure there’s plenty of people risking capital out there. But I’m excited about storage.

I’m excited about lots of things to do with the grid. I think everything from control systems, and people like Autogrid — they’re getting really good traction with the type of work they are doing in software. There are companies that are partnering with utilities in New York (ie. Smarter Grid Solutions and Sealed.)

I think people like Transphorm which has GaN technology that is transformational for power electronics. APEI had made great strides using SiC technology for both grid side and transportation applications. They’re much more power efficient. I think the whole power electronics space is moving, somewhat quietly.

And I’m excited about things like the battery management systems from Arbin and Ford that should be launching this fall, which will allow you to accelerate the testing and the understanding of these battery systems early.

One neglected space is the whole idea of air conditioning efficiency. Things like absorption chillers and some of the new technology for managing heating and cooling. It’s a little bit harder, and this is probably not as conducive to a venture model. But then that’s true in a lot of energy.

How do you view food and ag, and water?

Food and agriculture has gotten very hot over the past year and a bit, I’d say. And at least from ARPA-E’s perspective, we knew from the beginning that we needed to grapple with some of the challenges that the space faces. They just announced the awards for the plant phenotyping work.

It’s really exciting that someone like ARPA-E is putting money into that space, though it’s still kind of sorting itself out.

When it comes to water, certainly we have to grapple with some of the really hairy challenges and come up with some better answers. Water of course touches on energy: we could desalinate water for California, but it uses a lot of energy. It makes for some interesting conundrums. And ARPA-E just announced some funding for projects looking at air cooling for power plants — saying, let’s not use all this water in our power generation; let’s try to come up with some solutions.

ARPA-E has gone after a lot of these challenges and has made some really good progress. Hopefully theres a good ripple effect. I think as ARPA-E puts money in the space, more people look at it, and it can attract investors’ interest, where private investors can say, ‘Are there going to be things that we can fund?  Are there other companies that ARPA-E didn’t fund that we can also look at?’ It invites people that may have an answer that hadn’t thought about that problem before. That’s the great thing. The ripple effects are particularly exciting.

 

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