Alternative energy businesses and their financing got completely hammered in the second half of 2008: the Wilderhill New Energy Global Innovation Index fell at almost twice the rate of the Dow (down nearly 34% for 2008). But there's some good news:
New Energy Finance's Newsletter for Dec 9-15, 2008 reports that thin-film PV module manufacturing costs are approaching the $1 / watt mark. This puts price pressure on crystalline silicon-based PV, which is bad for the industry right now. But it's good for research.
The nutty green jet guy isn't a nut after all. Air New Zealand just test-drove a 747 running on a mix of jet fuel and the jatropha plant.
A zero-carbon city is due to arise in 2009, not in the US or EU but in the UAE - with major funding from the Abu Dhabi Future Energy Company.
Lots of bad 2008 trends will continue, but 2009 will be an interesting year for energy research. At it looks like this research will be more globally distributed and multi-polar than every before.
Showing posts with label solar. Show all posts
Showing posts with label solar. Show all posts
Thursday, January 1, 2009
Sunday, December 7, 2008
Renewable Energy Policy Moment
Writing at Renewable Energy World, Scott Sklar offers a helpful summary of the market forces currently battering renewables - declining energy demand, postponed investments in response, and more subtly, the declining impact of tax credits as the recession reduces companies' existing tax obligations.
Mr. Sklar's main solution is greatly improved procurement policies. Given the fragmented, labyrinthian nature of the federal government's programs, plus of course those of the 50 states, he writes the following:
There are some good ideas coming out of the transition team. For example, read the transition team co-chair John Podesta's piece on Green Recovery.
Mr. Sklar's main solution is greatly improved procurement policies. Given the fragmented, labyrinthian nature of the federal government's programs, plus of course those of the 50 states, he writes the following:
To reorient existing federal capital (loan, guarantee and bond programs) and existing procurement programs would requite a totally new approach by the Obama Administration. New procurement tools would need to be fashioned not only to accelerate procurements but aggregate procurements and leverage them regionally in concert with other state and local government procurement programs.Nice understatement. Effective procurement requires a kind of revolution in the federal bureaucracy. It would be interesting to know if the upside of the Obama appointments' bias toward the thinking of the 1990s would be some capaciaty for massive consolidation and coordination - the Manhattan Project that energy needs.
This would require White House coordination with mandatory participation by OMB, GSA, DOE's Federal Energy Management Program, and even DOD to insure these procurement and coordination tools could be realized
There are some good ideas coming out of the transition team. For example, read the transition team co-chair John Podesta's piece on Green Recovery.
Thursday, November 13, 2008
Solar "Panic"
From Reuters, November 12:
Chinese solar cell maker JA Solar Holdings Co Ltd said on Wednesday the global economic slump had triggered a "panic" in the solar market, prompting it to slash its sales forecasts and sending its shares down more than 30 percent.
Sales of solar cells and panels have risen sharply in recent quarters as companies such as JA Solar ramped up production of the clean power source, but the global economic slowdown has caused that growth to slow, leading to a supply glut.
"At this moment the market reaction has been panic," Samuel Yang, chief executive officer, told a conference call.
The company, which posted a quarterly loss from its ties to defunct investment bank Lehman Brothers, said it had cut back on output of the cells that turn sunlight into electricity and would seek to renegotiate its polysilicon supply contracts.
That effort to cut costs for polysilicon, the key material in its cells, was an attempt to offset an expected 20 percent price decline in the average selling prices of its products.
"Just recently the euro depreciated dramatically, more than 23 percent. So we have to adjust our ASP (average selling price) to support our customers," Yang said.
Europe is the largest market for photovoltaic solar equipment because of the subsidy programs set up by the German and Spanish governments.
JA Solar's stock plunged as much as 32 percent to $2.27 following the announcement, bringing its loss since the beginning of September to nearly 90 percent.
"We do not believe in the 'disaster scenario' implied by the stock's sharp drop during today's session," Raymond James analyst Pavel Molchanov said in a client note, noting that the stock was trading nearly 40 percent below its book value. "JA Solar's low cost structure and healthy balance sheet place it in a strong competitive position."
JA Solar said it would seek a 20 percent drop in the price it pays its suppliers for polysilicon in 2009, and that it had already won price concessions for 2008. The company would seek to push its contracted costs for silicon below the spot market price of about $200 to $220 per kilogram.
SALES TO SLOW
The company cut its 2008 revenue forecast to between $849.5 million to $878.9 million from the $1.05 billion to $1.17 billion it had forecast in October, and said its earnings per share would be near break-even.
It also cut its 2009 revenue forecast to $1.5 billion to $1.7 billion from the previously issued $2.0 billion to $2.2 billion.
Fourth quarter growth margins would drop to 5 to 7 percent, the company said, from 21.6 percent in the third quarter and 23.3 percent in the second quarter.
JA Solar said it lost a net $21.0 million, or 36 cents per American Depositary Receipt, in the third quarter. In the same quarter a year ago it earned $24.4 million, or 17 cents per ADS.
Excluding one-time items, the Hebei, China-based company reported earnings of 25 cents per share, just short of Wall Street analysts' average forecast of 26 cents per share, according to Reuters Estimates'
Total revenue rose to $312.3 million from $125.2 million, and beat estimates of $302.1 million, according to Reuters Estimates, as the company more than doubled its solar cell sales.
JA Solar posted a one-time loss of $100 million in investments it made with Lehman, a $7.3 million loss from the derivatives deals with the bank and a 1.1 million share dilution based on shares lent to the collapsed investment bank.
Chinese solar cell maker JA Solar Holdings Co Ltd said on Wednesday the global economic slump had triggered a "panic" in the solar market, prompting it to slash its sales forecasts and sending its shares down more than 30 percent.
Sales of solar cells and panels have risen sharply in recent quarters as companies such as JA Solar ramped up production of the clean power source, but the global economic slowdown has caused that growth to slow, leading to a supply glut.
"At this moment the market reaction has been panic," Samuel Yang, chief executive officer, told a conference call.
The company, which posted a quarterly loss from its ties to defunct investment bank Lehman Brothers, said it had cut back on output of the cells that turn sunlight into electricity and would seek to renegotiate its polysilicon supply contracts.
That effort to cut costs for polysilicon, the key material in its cells, was an attempt to offset an expected 20 percent price decline in the average selling prices of its products.
"Just recently the euro depreciated dramatically, more than 23 percent. So we have to adjust our ASP (average selling price) to support our customers," Yang said.
Europe is the largest market for photovoltaic solar equipment because of the subsidy programs set up by the German and Spanish governments.
JA Solar's stock plunged as much as 32 percent to $2.27 following the announcement, bringing its loss since the beginning of September to nearly 90 percent.
"We do not believe in the 'disaster scenario' implied by the stock's sharp drop during today's session," Raymond James analyst Pavel Molchanov said in a client note, noting that the stock was trading nearly 40 percent below its book value. "JA Solar's low cost structure and healthy balance sheet place it in a strong competitive position."
JA Solar said it would seek a 20 percent drop in the price it pays its suppliers for polysilicon in 2009, and that it had already won price concessions for 2008. The company would seek to push its contracted costs for silicon below the spot market price of about $200 to $220 per kilogram.
SALES TO SLOW
The company cut its 2008 revenue forecast to between $849.5 million to $878.9 million from the $1.05 billion to $1.17 billion it had forecast in October, and said its earnings per share would be near break-even.
It also cut its 2009 revenue forecast to $1.5 billion to $1.7 billion from the previously issued $2.0 billion to $2.2 billion.
Fourth quarter growth margins would drop to 5 to 7 percent, the company said, from 21.6 percent in the third quarter and 23.3 percent in the second quarter.
JA Solar said it lost a net $21.0 million, or 36 cents per American Depositary Receipt, in the third quarter. In the same quarter a year ago it earned $24.4 million, or 17 cents per ADS.
Excluding one-time items, the Hebei, China-based company reported earnings of 25 cents per share, just short of Wall Street analysts' average forecast of 26 cents per share, according to Reuters Estimates'
Total revenue rose to $312.3 million from $125.2 million, and beat estimates of $302.1 million, according to Reuters Estimates, as the company more than doubled its solar cell sales.
JA Solar posted a one-time loss of $100 million in investments it made with Lehman, a $7.3 million loss from the derivatives deals with the bank and a 1.1 million share dilution based on shares lent to the collapsed investment bank.
Tuesday, November 11, 2008
Renewable Energy - So Three-Months-Ago
This piece from the Financial Times is one of a series of reports about falling investment in the renewable energy sector. The sector is getting squeezed between the crisis in the financial markets on the one hand, and falling oil prices on the other.
When a group of us spoke in June to physicist and 3rd-Generation solar photovoltaics researcher Alan Heeger, he said he thought much of the investor motivation was driven by the high price of gasoline and not by a sincere commitment to alternative energy development. I thought this was a bit cynical at the time, but he is turning out to be correct.
The test will be what happens when the global recession keeps oil prices weak as the credit markets stabilize. If alternative energy investment doesn't come back then - even when helped by large state investment in China and perhaps even in the US - then Prof. Heeger will be, to his great sorrow, proven correct.
I personally believe the last line of the piece below.
****
Clean energy investment falls sharply
By Fiona Harvey in London, Richard Waters in San Francisco and Sheila McNulty in Houston
Published: November 10 2008 18:08 Financial Ties
Investment in low-carbon technologies is suffering its first reversal after several years of record growth, as the financial crisis dims the sector’s prospects.
Worldwide investment in clean energy companies and new clean energy capacity fell sharply in the third quarter of 2008, compared with the previous quarter, according to New Energy Finance, a market analyst company.
Venture capital and private equity investment totalled $4.4bn in the third quarter, down 24 per cent from the $5.8bn in the second quarter of 2008.
Brent Goldman, partner at BDO Stoy Hayward, said: “We are seeing less activity across the whole market.
“There will be more and more businesses without enough funds, and they will struggle.”
Clean technology investment has soared in the past four years, on the back of high conventional energy prices and fears over climate change and energy security. The cost of renewables has come down and governments have increased their subsidies.
But many clean technology companies are at an early stage, and have found it more difficult to raise funds. Longer established companies have suffered less, but some have found it harder to find funds and credit for expansion.
Capital raising in the public markets was down in the third quarter, at about $2.6bn of new money raised – most of which came from convertible issues rather than flotations or rights issues – compared to $4.9bn in the second quarter.
The biggest public capital raising was by EDF Energies Nouvelles, the French renewable energy company, raising $734m through a secondary issue.
The biggest IPO recorded by New Energy Finance from July to September, at $87m, was Energy Recovery, a Californian energy efficiency specialist.
M&A activity among clean technology companies also fell, by 21 per cent to $2.9bn in the third quarter.
But the financing of new capacity in the clean energy market, such as the building of new wind farms, remained strong at $19bn in the third quarter, only marginally down on the $23bn in the second quarter of this year.
However, as clean technology investment remained relatively strong for the first half of this year, new investment in clean energy worldwide is likely to be only about 4 per cent lower in 2008 than last year, according to New Energy Finance.
Michael Liebreich, chief executive of New Energy Finance, predicted investment would return to its previous high levels next year.
He said: “There will be a hiatus of about six months, but then capital will return. The fundamentals of this business still look good.”
When a group of us spoke in June to physicist and 3rd-Generation solar photovoltaics researcher Alan Heeger, he said he thought much of the investor motivation was driven by the high price of gasoline and not by a sincere commitment to alternative energy development. I thought this was a bit cynical at the time, but he is turning out to be correct.
The test will be what happens when the global recession keeps oil prices weak as the credit markets stabilize. If alternative energy investment doesn't come back then - even when helped by large state investment in China and perhaps even in the US - then Prof. Heeger will be, to his great sorrow, proven correct.
I personally believe the last line of the piece below.
****
Clean energy investment falls sharply
By Fiona Harvey in London, Richard Waters in San Francisco and Sheila McNulty in Houston
Published: November 10 2008 18:08 Financial Ties
Investment in low-carbon technologies is suffering its first reversal after several years of record growth, as the financial crisis dims the sector’s prospects.
Worldwide investment in clean energy companies and new clean energy capacity fell sharply in the third quarter of 2008, compared with the previous quarter, according to New Energy Finance, a market analyst company.
Venture capital and private equity investment totalled $4.4bn in the third quarter, down 24 per cent from the $5.8bn in the second quarter of 2008.
Brent Goldman, partner at BDO Stoy Hayward, said: “We are seeing less activity across the whole market.
“There will be more and more businesses without enough funds, and they will struggle.”
Clean technology investment has soared in the past four years, on the back of high conventional energy prices and fears over climate change and energy security. The cost of renewables has come down and governments have increased their subsidies.
But many clean technology companies are at an early stage, and have found it more difficult to raise funds. Longer established companies have suffered less, but some have found it harder to find funds and credit for expansion.
Capital raising in the public markets was down in the third quarter, at about $2.6bn of new money raised – most of which came from convertible issues rather than flotations or rights issues – compared to $4.9bn in the second quarter.
The biggest public capital raising was by EDF Energies Nouvelles, the French renewable energy company, raising $734m through a secondary issue.
The biggest IPO recorded by New Energy Finance from July to September, at $87m, was Energy Recovery, a Californian energy efficiency specialist.
M&A activity among clean technology companies also fell, by 21 per cent to $2.9bn in the third quarter.
But the financing of new capacity in the clean energy market, such as the building of new wind farms, remained strong at $19bn in the third quarter, only marginally down on the $23bn in the second quarter of this year.
However, as clean technology investment remained relatively strong for the first half of this year, new investment in clean energy worldwide is likely to be only about 4 per cent lower in 2008 than last year, according to New Energy Finance.
Michael Liebreich, chief executive of New Energy Finance, predicted investment would return to its previous high levels next year.
He said: “There will be a hiatus of about six months, but then capital will return. The fundamentals of this business still look good.”
Saturday, May 17, 2008
Germany's Solar Valley
While the entire Center for Nanotech nology in Society was having its site visit from our funders, the National Science Foundation, the New York Times published a piece about one of the solar companies our Innovation Group has been watching, Q-Cells of Thalheim, a town in the former East Germany. Q-Cells "surpassed Sharp last year to become the world's largest maker of photovoltaic solar cells." Some people are calling the area around Thalheim "Solar Valley." Germany gets 14% of its energy from renewable sources, has half of the worlds total PV installations, and is the third largest producer of PV modules (behind only China and Japan).Why is solar doing so well in Germany? Q-Cells is a sample beneficiary of public support for renewable energy that is far better in Germany than what we have in the United States. One part of our lagging support is direct R&D investment. During my presentation yesterday I showed a chart from a paper of one of our partners, David Mowery, showing the literally invisible chunk of US federal R&D spending devoted to energy - about $3 billion a year in 2006, for all energy research, including under $70 million for carbon capture and sequestration. Less than one-tenth of the already small amount of $3 billion goes to all forms of renewable energy in the US.
But another piece of the story is procurement.
At the heart of the debate is the Renewable Energy Sources Act. It requires power companies to buy all the alternative energy produced by these systems, at a fixed above-market price, for 20 years.
This mechanism, known as a feed-in tariff, gives entrepreneurs a powerful incentive to install solar panels. With a locked-in customer base for their electricity, they can earn a reliable return on their investment. It has worked: homeowners rushed to clamp solar panels on their roofs and farmers planted them in fields where sheep once grazed.
The amount of electricity generated by these installations rose 60 percent in 2007 compared with 2006, faster than any other renewable energy (solar still generates just 0.6 percent of Germany’s total electricity, compared with 6.4 percent for wind).
Solar has been hurt for 25 years by "market failure" - the failure of markets to provide financial returns that support socially-desirable investment. Germany has overcome solar market failure as well as anyone. Even as the Merkel government proposes undoing this, the US should implement its own versions of feed-in tariffs that will support consumer switching.
Friday, May 2, 2008
Alternative Energy and Federal Credits
So many people mentioned this Tom Friedman piece on upside-down energy policy that I had to link it. Friedman is right about how stupid it is for Congress to have continued credits for gas and oil and stopped those for solar and wind. It's also worth noticing the testimonies in the piece about how alternative energy in the US, especially wind, attracts investment capital only with tax deals to offer investors.
Friedman's ending is painfully true: "The McCain-Clinton proposal is a reminder to me that the biggest energy crisis we have in our country today is the energy to be serious — the energy to do big things in a sustained, focused and intelligent way."
“It’s a disaster,” says Michael Polsky, founder of Invenergy, one of the biggest wind-power developers in America. “Wind is a very capital-intensive industry, and financial institutions are not ready to take ‘Congressional risk.’ They say if you don’t get the [production tax credit] we will not lend you the money to buy more turbines and build projects.”
Friedman's ending is painfully true: "The McCain-Clinton proposal is a reminder to me that the biggest energy crisis we have in our country today is the energy to be serious — the energy to do big things in a sustained, focused and intelligent way."
Thursday, April 3, 2008
Solar Mismatch
Here's an article about a nice idea for getting solar into home use: seller financing. A company like Solar City buys the photovoltaic panels, designs the system, and installs it. The homeowner pays a monthly fee to the company that's a little like a mortgage.
But then you think about it for a minute and realize that these homeowners will spend fifteen years buying technology that, given the current rate of research, is likely to be obsolete fourteen years before they stop paying for it.
Solar needs a better procurement strategy than this. It needs to be one that can make markets for leading-edge technology and then also finance the installation of the next wave, and the next, and help the customer with upgrades.
***
http://www.latimes.com/business/la-fi-solar3apr03,1,405880.story
From the Los Angeles Times
Firms seek to make solar power more affordable
Companies launch programs to cut the initial outlay for homeowners to as little as 10% of the total installation cost.
By Elizabeth Douglass
Los Angeles Times Staff Writer
April 3, 2008
Turning the sun's rays into energy is an expensive endeavor, so solar companies are cooking up financial products that lower the upfront costs for homeowners and businesses.
Foster City, Calif.-based SolarCity is the latest to jump in, launching a lease program Wednesday that would slash the initial outlay for residential customers to as little as 10% of the total installation cost.
"One of the most common reasons that people are unable to go solar is because of the high upfront cost," said Chief Operating Officer Peter Rive, who founded SolarCity with his brother, Lyndon, the company's chief executive. "We're hoping that it revolutionizes the way people purchase electricity."
Rive said an average four-bedroom home would need a 4-kilowatt solar-electric system, which could cost about $25,000 for equipment and installation. That investment pays off financially, but it's a long wait.
"The payback time is long enough that you're effectively going to invest the money into your house and not expect to get it out for a while," said V. John White, executive director of the Sacramento-based Center for Energy Efficiency and Renewable Technologies. Leasing arrangements like the one offered by SolarCity, he added, "allow people to add solar without as much money upfront, which makes it less of a rich man's game."
Under SolarCity's plan, the customer's only ongoing cost is the monthly lease payment. The homeowner gets the use of the solar power generated by the rooftop system and gets the bill credits when there is excess power that can be fed back into the power grid.
Companies such as Sun Run, SunPower Corp. and SunEdison take another route. They pay the equipment and installation costs, then sell the power at variable prices to the customer through a power purchase agreement.
SolarCity doesn't make the photovoltaic panels, but it specializes in designing and installing systems tailored to each site's needs. The panels are typically installed on rooftops, but they also can be set up on the ground.
Under the lease program, offered in California and soon in Arizona and Oregon, SolarCity would design and install a homeowner's solar-electric system, keeping ownership of the equipment and paying for maintenance and replacement parts.
SolarCity, with backing from Morgan Stanley, offers homeowners several lease options. A homeowner installing a 4-kilowatt solar system could opt for a low initial payment of $2,125, plus monthly payments of $200 for 15 years, the company said.
Homeowners focused on keeping monthly payments low could choose to pay $4,600 upfront, then pay $175 a month for 15 years. A seven-year lease would cost $6,650 down, then $215 a month. Customers who move can either transfer the lease or buy it out.
The switch generally pays off for homeowners who use enough electricity to push them into more expensive rate tiers, yielding monthly electric bills above $200, according to SolarCity. That benchmark could get easier to hit in the coming years, because all of the state's largest utilities have instituted or are pushing for large rate hikes.
elizabeth.douglass@latimes.com
But then you think about it for a minute and realize that these homeowners will spend fifteen years buying technology that, given the current rate of research, is likely to be obsolete fourteen years before they stop paying for it.
Solar needs a better procurement strategy than this. It needs to be one that can make markets for leading-edge technology and then also finance the installation of the next wave, and the next, and help the customer with upgrades.
***
http://www.latimes.com/business/la-fi-solar3apr03,1,405880.story
From the Los Angeles Times
Firms seek to make solar power more affordable
Companies launch programs to cut the initial outlay for homeowners to as little as 10% of the total installation cost.
By Elizabeth Douglass
Los Angeles Times Staff Writer
April 3, 2008
Turning the sun's rays into energy is an expensive endeavor, so solar companies are cooking up financial products that lower the upfront costs for homeowners and businesses.
Foster City, Calif.-based SolarCity is the latest to jump in, launching a lease program Wednesday that would slash the initial outlay for residential customers to as little as 10% of the total installation cost.
"One of the most common reasons that people are unable to go solar is because of the high upfront cost," said Chief Operating Officer Peter Rive, who founded SolarCity with his brother, Lyndon, the company's chief executive. "We're hoping that it revolutionizes the way people purchase electricity."
Rive said an average four-bedroom home would need a 4-kilowatt solar-electric system, which could cost about $25,000 for equipment and installation. That investment pays off financially, but it's a long wait.
"The payback time is long enough that you're effectively going to invest the money into your house and not expect to get it out for a while," said V. John White, executive director of the Sacramento-based Center for Energy Efficiency and Renewable Technologies. Leasing arrangements like the one offered by SolarCity, he added, "allow people to add solar without as much money upfront, which makes it less of a rich man's game."
Under SolarCity's plan, the customer's only ongoing cost is the monthly lease payment. The homeowner gets the use of the solar power generated by the rooftop system and gets the bill credits when there is excess power that can be fed back into the power grid.
Companies such as Sun Run, SunPower Corp. and SunEdison take another route. They pay the equipment and installation costs, then sell the power at variable prices to the customer through a power purchase agreement.
SolarCity doesn't make the photovoltaic panels, but it specializes in designing and installing systems tailored to each site's needs. The panels are typically installed on rooftops, but they also can be set up on the ground.
Under the lease program, offered in California and soon in Arizona and Oregon, SolarCity would design and install a homeowner's solar-electric system, keeping ownership of the equipment and paying for maintenance and replacement parts.
SolarCity, with backing from Morgan Stanley, offers homeowners several lease options. A homeowner installing a 4-kilowatt solar system could opt for a low initial payment of $2,125, plus monthly payments of $200 for 15 years, the company said.
Homeowners focused on keeping monthly payments low could choose to pay $4,600 upfront, then pay $175 a month for 15 years. A seven-year lease would cost $6,650 down, then $215 a month. Customers who move can either transfer the lease or buy it out.
The switch generally pays off for homeowners who use enough electricity to push them into more expensive rate tiers, yielding monthly electric bills above $200, according to SolarCity. That benchmark could get easier to hit in the coming years, because all of the state's largest utilities have instituted or are pushing for large rate hikes.
elizabeth.douglass@latimes.com
Sunday, February 17, 2008
Energy and Innovation
Pascal Zachary is the New York Times's man in Silicon Valley, and he's done a quick tour of SV companies working on solar. This is not Zachary above, however, but T.J. Rogers, CEO of Cypress Semiconductor and also the head of its new solar company, SunPower Corporation.Call me shallow, but I would feel less like this were less of a publicity stunt if Rogers weren't dressed like the missing member of a barber-shop quartet.
The article mentions a couple of promising tech areas - thin-film and the more original solar thermal. The technology is incredibly interesting.
1.
The business statements are incredibly boring. I mean "boring" in the clinical sense of the experience that comes from disavowing a painful truth. Boring-but-true statements #1 and #2 are:
- "Affordable solar development is also still dependent on government subsidies."
- "so much of our effort is going into short-term victories that I worry our pipeline will go dry in 10 years."
2.
Most U.S. readers don't think this contrast between markets and government reflects reality. At least two generations of sociologists, B-school theorists and journalists have discovered the network, and consider it the crucial third term. High-tech business pulls people and resources from everywhere - government labs, universities, large corporations, start-ups, NGOs, and takes whatever it needs. In the U.S., networks are thought to make government direction obsolete, whether it's called investment, industrial policy, or something else. A case in point is a good piece by Jason Owen-Smth and Woody Powell in the book Cluster Genesis, whose title starts making the book's core point that both research and development take place in clusters that combine disparate institutional forms and continuously and dynamically evolve. The authors look at "strategic alliance networks" in biotech in Boston and the Bay Area, identify five types of organizations and four kinds of connections among them (R&D, financial, licensing, and commercialization). The core point is that clusters and their geography form the infrastructure of biotech development. Although big firms tried to "cherry-pick" the best people and ideas, and everyone predicted biotech shake-outs and consolidation, this trend "faced significant obstacles imposed by deeply collaborative R&D efforts and a mobile scientific work force." As the sector evolved, "the pattern of dense inter-connection deepened, suggesting that the original motivation of exchanging complementary resources had shifted to a broader focus on mining innovation networks to explore new forms of collaboration and product development."
The network is thus more fundamental than financial markets or government planning, in this view, and in some sense the latter categories don't really make sense since they never operate as such. Owen-Smith and Powell find that Bay Area biotech has relied more on venture capital than Boston-area firms, which had more partnerships with academic and public-sector organizations. And yet although the Bay Area relied more on private capital, and Boston on public science, both regions did quite well, generating successful firms and valuable products.
But there are important differences in the innovation systems too. The "private" Bay Area system produced almost twice as many patents per firm as Boston's public. But another measure (variance in forward citations) is higher in Boston, suggesting that that region may engage in more "'exploratory' innovative research." In other words, the VC-fueled Bay Area folks may patent everything in sight, including incremental improvements as a defensive play.
Another important network indicator is "prior art" citations in patents, or backward citations. The "open" public-science structure of Boston-area biotech made 71 percent of its citations of prior art to non-biotech firms while that number was only 45 percent in the Bay Area. Owen-Smith and Powell interpret this to mean that the more commercially-driven, VC-based Bay Area cluster consisted of firms that were interested in their own research and that of their competitors, and less in research from outside their industry sector. When the authors compared a firm from each area that had developed competing therapies for the same condition (relapsing multiple sclerosis), they found this pattern replicated in the patent citation patterns of the respective firms.
The same pattern appears in a third indicator - product type. The Bay Area cluster produced more therapeutics more quickly - about twice as many. But the Boston cluster focused on treatments for rare diseases covered by "orphan designations" that offered "tax breaks and regulatory assistance to organizations that develop such medicines." There was a difference in strategy in the two cases, and although the authors don't use the term, Boston is closer to the outcomes one would expect of "public science" - addressing a clear need even when markets will offer modest or minimal rewards.
Thus "network" isn't so much a third term as a compound of the other two. Good empirical work redivides it into two familiar tendencies. The first cluster - the Bay Area's - is composed "largely of competitors and investors [who] are primarily concerned with speed and with commercial development, hence they pursue a more focused innovation process that relies heavily on internal R&D and attention to the efforts of direct competitors." On the other hand, there are "firms that are embedded in networks anchored by public research organizations and that lack strong investor involvement" and thus don't only "pursue immediate commercial returns." The latter, Boston model relies on external sources of knowledge and favors "more exploratory efforts at discovery." Governing ties in Bay Area firms tend to be more exclusively financial. Finally, the Bay Area model seems to be suffering some kind of lock-in, as the need for access to early capital sends firms back to the same small group of VC folks - with their same strategies, connections, and goals - again and again and again.
Even scholars dedicated to network theory with excellent data point out the constant danger of market failure and the rarity of a strong foundation of Boston-style public science.
3.
There's also something about the sheer exteriority of this understanding of innovation - big and small companies, capital flows, people from famous corporations who start new ones. What about the invention process?
I happened to read this passage in a London Review of Books piece about a new book on gravitational waves.
Near the end of the 17th century, Edmond Halley examined records of medieval and ancient solar eclipses back to the time of Ptolemy. He discovered that when he used the position and trajectory of the Moon to determine retrospectively when solar eclipses should have occurred, the times calculated differed from the actual ones by up to an hour. Halley deduced that in the past the Moon must have moved across the sky from east to west more slowly than in his own time. This was a far-reaching, even heretical assertion. For the Moon to have changed its motion in such a way would imply that its course through the heavens did not repeat in periodic orbits. Such ‘secular’ changes in its orbit could eventually cause the system itself to disappear, and the Moon to fall into the Earth or escape into space. For many philosophers, to theorise that the cosmos could decay in this way was a slur on the Almighty, as it implied that God was such an unskilled craftsman as to have constructed a system of stars and planets that could fall into ruin and disorder. Nonetheless, Halley was right, as even the fundamentalists were eventually forced to concede. The question now became: what causes the secular acceleration of the Moon?This passage amazed me. I can't imagine running these complicated hand calculations for days and weeks and maybe months, coming up with a one-hour difference over decades and centuries, and not thinking oh well, I screwed up a line of my math. How do we still find and nurture these people - the ones with the sheer courage, the mind-boggling stubbornness, to decide they are right, everyone else is wrong, there's a one-hour gap, then come up with a new theory, one that would not be bourne out for hundreds of years?
How do we remake a business system with enough space and time to allow this kind of research? How likely is it to happen in California?
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