Friday, November 20, 2009

Why Hawaii Technology Companies Should Consider Outsourcing Their R and D Work

Hawaii technology companies are typically underfunded with venture capital by 1/5 to 1/10 what Mainland competitors can command for a comparable venture proposal. The funding deficit for tech companies here has gotten even worse with the current recessionary economy, pullback of venture capital firms from startup funding in general, and collapse of Act 221 tax credit incentives for Hawaii investors. As a result, Hawaii tech companies with good research innovations may have insufficient funds to conduct the R and D work needed to validate proof-of-concept into a commercializable or licensable product. Even if they can accomplish this step, commercialization would be difficult to achieve given Hawaii’s underdeveloped business infrastructure and impediments to cost-effective manufacturing, distribution and shipping to global markets.

One promising avenue for Hawaii tech companies to bridge their funding deficit and achieve commercialization is by outsourcing their R and D work to foreign countries having professional workers with high STEM skill levels employable at low labor rates relative to those in the U.S. Many countries produce STEM graduates with skill levels comparable to ours, but at 1/5 to 1/10 the wage cost. Countries like China, India and the Philippines are especially attractive given that English is spoken universally by science and engineering graduates and by most educated businesspeople.

I recently toured a number of cities in the Philippines as part of a trade mission organized by the Filipino Chamber of Commerce of Hawaii. Besides promoting tourism to Hawaii and sister-city-state relationships with Philippine cities and provinces, the trade mission also explored possibilities for business relationships between Hawaii and Philippine companies. Business process outsourcing (BPO), such as for call-center operations, CAD and architectural drafting, medical records transcription, and data entry of written records, has developed into a major industry in the Philippines in recent years. With increasing technical sophistication, it is now moving into knowledge process outsourcing (KPO), such as agricultural field testing, medical clinical trials, IT programming, and ICT engineering.

A business model for a Hawaii tech company working with a Philippine partner might work like this:

1. The Hawaii tech company develops a new technology covered by U.S. and international patent filings, has a system design ready for testing, but has a small U.S. R and D budget.

2. A Philippine tech partner can do the field testing under an outsourcing contract on a wage scale 1/5 to 1/10 of the U.S. The Hawaii budget can therefore be stretched to encompass at least 2X or 3X more than can be obtained with the same budget in the U.S.

3. The Hawaii partner pays the contract price upon completion and assigns the technology rights and PI patent filing rights to the PI partner to exploit the technology in their own domestic PI market.

4. Successful exploitation by the PI partner in the domestic PI market validates the technology for sales or licensing in other countries in which the Hawaii partner holds strong IP rights, such as Japan, China, Korea, Hong Kong, Singapore, and Australia.

5. The Hawaii partner gains a tested system on a small budget and can exploit the product for sales or licensing in global markets. The PI partner can manufacture and ship the product for the Hawaii partner to nearby Asian markets at a much lower cost than from the U.S.

While corruption and cronyism may continue to impede foreign investment in established business areas like Manila, newly developing areas of the Philippines can provide a more conducive business environment for foreign investment. For example, the Subic Bay Metropolitan Authority (SBMA) is constituted to develop the 67,000 hectare former U.S. naval base as a Freeport and Special Economic Zone into a self-sustaining industrial, commercial, financial, investment, and academic center.

SBMA is only 100 kilometers from Manila and connected by the new SCT Expressway. It has complete deep-water port facilities and is only 24 hours sailing time to Taiwan, 28 hours to Hong Kong, 53 hours to Shanghai, and 70 hours to Kobe, Japan. Subic has an onsite international airport and is also only 45 minutes drive away from the larger Clark airfield that has large available capacity for international flights and airfreight. New condo buildings, trade office towers, university extensions, and affordable housing constructions are slated for completion beginning in mid to late 2010. Hanjin Industries of Korea has invested $2 billion in upgrading shipbuilding and port loading/unloading facilities, and Philippine contractors in manufacture and metal-working are lining up to provide skilled labor. SBMA will thus have state-of-the-art infrastructure for tax-free manufacture, assembly, and shipping of technology products to ASEAN and other Asian markets.

By outsourcing R and D work to suitable foreign partners in developing economic zones like Subic Bay, Philippines, Hawaii technology companies can overcome their funding deficit and have the necessary work done by their foreign partner leveraged several times more than what their budget could accomplish in the U.S. Further, by enabling their foreign partner to successfully exploit the now-proven technology in their own domestic market, the Hawaii tech company gains validation of the technology for sales or licensing in other countries in which it holds strong IP rights. The foreign partner would also be enabled to manufacture and ship the product to orders for the Hawaii partner to global markets at a much lower cost, and therefore greater profitability, than from the U.S.

Thursday, August 27, 2009

A New Model for Venture Capital Investment in Tech Companies in Hawaii

The high technology investment tax credits under Act 221, as modified recently in Act 178, will sunset at the end of 2010. Already proposals are circulating among tech industry advocates for an improved tax credit scheme and/or separate tax credit bills tailored for different tech industries. However, I predict that there will be little interest in the State Legislature or the Governor’s Office for tax credit proposals to extend or succeed Act 221. The State faces declining tax revenues and budget deficits for years to come. The debate will continue whether the billion dollars of Act 221 tax credits claimed by 2010 will have provided commensurate benefits to the State. Hawaii tech investors, spoiled by tax credit multiple deals, are glutted and have become risk-averse. And the blowback from professional venture capital firms has been that Act 221 unduly skewed investment risk and value and led investors to seek tax deals over creating successful companies.

At the same time, it has been widely overlooked that the traditional venture capital model on which our companies have been funded is largely unsuited to their actual circumstances in Hawaii. The so-called “Silicon Valley model” works there because they have ample venture capital, robust tech industry synergies and business infrastructure, and a large pool of entrepreneurial talent and skilled techies. In the Silicon Valley environment, a company business plan based on being first-to-market and achieving exponential sales growth worldwide has a decent chance of success. In contrast, Hawaii has a business infrastructure based on agriculture, tourism, and real estate, our venture capital pool is small, our geographical isolation and lack of efficient transportation infrastructure imposes prohibitive costs on distribution and shipping, and our schools lag in graduates with business and technical skills competitive with the Mainland. In the Hawaii environment, a business plan based on exponential sales growth worldwide has almost no chance of success, yet almost all venture capital deals we have seen in the past keep “barking up the wrong tree”.

It is time that we put on our thinking caps and create a new model for venture capital investment more suited to our real circumstances in Hawaii. I advocate three major changes to the Hawaii venture capital model for tech companies:

1. Allow Act 221 to sunset, and implement the Act 215 State Private Investment Fund (SPIF) to be funded with up to $38 million in state tax credits that can be used to guarantee secured interest-bearing notes issued to lenders.

2. Have the SPIF act as a “fund-of-funds” to sector-focused tech investment firms required to raise 3:1 private equity funds to match SPIF investment, thereby multiplying by 4X the total investment pool available to invest in promising tech companies.

3. Encourage tech investment firms in Hawaii to shift away from the Silicon Valley model which has proved unworkable in Hawaii and toward the alternative R and D company model of direct monetization by tech transfer which plays to our strengths.

As for replacing Act 221, we already have a useful tax credit vehicle enacted with Act 215 in 2006 which, besides modifying the tax reporting requirements for Act 221 tax credits, also established the State Private Investment Fund (SPIF). Conceived as a “fund-of-funds”, SPIF is to be administered by the Hawaii Strategic Development Corporation (HSDC), a semi-autonomous agency under DBEDT. HSDC may issue up to $38 million of State income tax credits as authorized by the Legislature to guarantee repayment of loans and investments by external parties into an SPIF revolving fund. The SPIF revolving fund may then make loans and other investments to qualified tech investment firms to leverage their investments in portfolio tech companies.

For example, HSDC notes issued to lenders could be offered with a yield of say 4.5% cumulative over a 10-year term, repayment of which is guaranteed by state tax credits. In rough numbers $38 million cumulative at a 10-year maturity is equivalent to about $24 million in borrowed funds today. HSDC would then use the $24 million to sprinkle investments into a number of tech sector-focused investment firms. In the worst case, if all investments by all tech investment firms fail, then HSDC would be obligated to issue $38 million in tax credits to repay its lenders at maturity.

Since the notes issued on loans made to the SPIF would carry an attractive annual yield and are guaranteed for repayment with state tax credits, the pool of potential lenders would be expanded beyond individual accredited investors to mainstream sources of capital, such as banks, insurance companies, real estate companies, and annuity funds. This would ensure that the SPIF can be fully funded to the authorization limits set by the Legislature, and expanded if justified by performance.

As a fund-of-funds, the SPIF could require tech investment funds to raise say 3:1 in private equity funds to match its investment, thereby raising a total investment pool of $96 million. The SPIF can also target investment funds that focus on specific tech sectors in Hawaii and are managed by fund managers with specific domain expertise to better evaluate tech company opportunities and share their expertise with their portfolio companies.

The “third leg” of this prescription for a new venture capital model in Hawaii is to encourage tech investment firms in Hawaii to shift away from the Silicon Valley model which has proved unworkable in Hawaii. The Silicon Valley model is based on achieving a high valuation for an IPO or M&A exit by ramping up from startup to exponential sales growth. This is difficult if not impossible to execute in Hawaii with our constraints on venture capital, geographical remoteness, lack of distribution and business infrastructure, and small pool of skilled workers. Instead, most of the successful tech deals and investor exits in Hawaii, such as Verifone, Adtech, STI, Cheap Tickets, Digital Island, Hawaii BioScience and Blue Planet Wireless, were actually (although maybe not intentionally) accomplished by tech transfer to larger, more established companies that had the economies of scale and distribution channels to commercialize products and services successfully. None of these Hawaii exits left any permanent manufacturing, distribution, product sales, or service fulfillment jobs in the Islands. The investment capital used by those Hawaii companies to try to execute an exponential sales growth business plan was essentially a wash, whereas what the acquiring companies paid for were really their technology positions. So why not structure investment in Hawaii tech companies from the beginning based on monetizing technology positions through tech transfer? This is the alternative business model that I call the “R and D company model”.

The R and D company requires a smaller amount of investment and has lower business and market risk because its basic tasks are to protect its intellectual property (IP) rights, prove that the technology works, and develop a marketable product that an acquiring company can make profits on. Upon a successful exit by tech transfer to an established company, the R and D company can negotiate a grantback field-of-use license for Hawaii or preferred Asia-Pacific markets and parlay its newly acquired credibility and business alliances into venture capital funding of an ongoing Hawaii operating company that can credibly execute commercialization of the now-proven technology in geographically proximate markets. Tech incubators like Cellular Bioengineering headed by Hank Wuh and Oceanit by Pat Sullivan, and even individual inventors like Dr. Rob Yonover (author of "Hardcore Inventing"), are making good use of the R and D company model. New tech funds are also exploring focused investments in R and D companies, such as the State’s Hydrogen Fund managed by Kolohala Partners for investing in hydrogen research and infrastructure companies.

A typical R and D company in Hawaii can execute a tech transfer business model with funding in a range of $500,000 to $2 million, with the average being about $1.2 million. An exit can be expected in 5 or so years, with the first 3 years being directed to IP protection, technology validation, and product research and development, and the latter 2 years directed to technology marketing and licensing or sale negotiations. If there are no takers by then, there is seldom any need to drag things out. No second or third round of funding is needed. The tech investment fund can securitize their investment in portfolio companies with IP assets as collateral which can be liquidated through auctions or industry pools to reduce losses, or a new investor group may be found to buy out the IP assets from the previous investors. Among my clients that have used the R and D company model successfully, a typical tech transfer exit can provide a return in the range of about 4X – 10X to investor(s). On the upside, an R and D company that sells or licenses a technology position having industry-dominating significance can realize returns on investment in the range of 10X to 100X, comparable to returns on Silicon Valley IPOs and M&As.

The smaller amounts of funding required by R and D companies to execute a tech transfer business plan would enable the investment pool of $96 million of SPIF-backed investment firms to go much farther. If the average R and D company funding is about $1.2 million compared to an average of $5 million invested in Series A and B rounds to try to emulate the Silicon Valley model, then $96 million of investments in companies using the R and D company model could be made to cover 4 times as many companies as funding the Silicon Valley model. Because the R and D company model exit is based on tech transfer for value, these exits are more likely to be transacted, entail less market and business risk, and are therefore more likely to return overall value to the investment funds, thereby promoting their success and that of the SPIF fund-of-funds.

In summary, given what we have learned from the Act 221 experience and the realities of the Hawaii business environment that our tech companies work within, we should consider this new model for venture capital investment in tech companies in Hawaii. Funding an SPIF revolving fund under Act 215 through secured loans paying an annual yield guaranteed by state tax credits would open the pool for tech investment to larger and more mainstream sources of capital, such as banks, insurance companies, real estate companies, and annuity funds. Using the SPIF vehicle as a “fund of funds” would leverage larger private investment funds and provide a more effective use of state tax credits. Targeting SPIF investments into a number of funds each focused on a promising tech sector would concentrate domain expertise, spread risk, cover more innovation, provide more knowledgeable vetting of potential deals, and enable sharing of industry-specific management expertise with portfolio companies. Finally, instead of pursuing a Silicon Valley model that has not worked in Hawaii, we can reorient tech investment into R and D companies that require lower amounts of capital, have lower business and market risk, have quicker, more achievable exits, and can provide comparable rates of returns for investors.

Thursday, July 16, 2009

It’s Back-to-Business for Hawaii Tech Companies!

Well, it’s official. The Governor did not veto the Legislature’s Bill 199, so Hawaii’s Investor Tax Credit for investments in high technology companies has now been scaled back from an allowed multiple up to 200% to “only” 100% return of state tax credits to Hawaii investors, and the credits will now be claimable at no more than 80% of State income tax liability per year. Actually, the scaling back of benefits was not so bad. Rather, it was the way the whole tax credit program has been conducted over the past 10 years, reinforcing the perception that Hawaii is not a good place to do business. There is plenty of blame to go around on all sides, from the tech industry’s resistance to disclosure of jobs created and companies benefitted or to timely compromise to help the State close its huge budget deficit, to the Administration’s fecklessness in administering the tax program and articulating its support of development of the tech sector. This whole charade is mandated to sunset in 18 months anyway. Hopefully, the next iteration will be better conceived, supported and executed.

So, what now? The national economy remains in recession, trillion-dollar federal budget deficits will continue to grow, and the State will see declining revenues and negative growth in its mainstay real estate and tourism industries for years to come. If there is any desire of investors to invest in technology companies in Hawaii, they will be tight-fisted and very choosy over fewer deals. So is our tech sector doomed to wither and die? Not necessarily. Even in Silicon Valley, the new wave of tech investment is toward smaller amounts in more focused companies. Hawaii tech companies can thrive using an alternative business model in which smaller amounts of capital, possibly leveraged with research grants, are used to validate technology and secure IP rights that can be licensed, pooled or sold to more established, national or global companies that have the size and economies of scale to commercialize the technology in their industries.

This is actually not a new thing in Hawaii. Most of our successful tech deals and investor exits over decades have followed this model, although not by calling it the “R and D business model”, and often only when facing bankruptcy or business default. For example, Verifone pioneered its credit card POS technology in Hawaii, but moved to California for manufacturing and sales growth, in effect exporting its IP rights in patented technology to the Mainland. Hawaii Biotech also ended up exporting its IP rights in tropical vaccines to an Australian pharma company while retaining only a research presence in Hawaii. Ad Tech essentially sold its IP rights in broadband test equipment to Spirent, and Spirent now maintains a regional sales office here. Digital Island was acquired by U.K.’s Cable & Wireless essentially for its IP rights. BAE Systems bought STI’s patented hyperspectral imaging technology, and maintains a research office for its biomedical spinoff here. Almost all significant Hawaii tech deals have gone this route. That is why we continue to see good technologies developed in our university and DoD research labs, but no permanent manufacturing or product sales from the Islands.

In the alternative business model, the R and D company can secure IP rights in the form of copyright-protected software and media, patented invention rights, and/or licensable engineering know-how. It can monetize these IP rights by licensing, pooling or selling to established companies in the Mainland U.S. and globally. As a further option once its technology has been validated through licensing, it can seek the next stage of venture capital funding for spinning out a sublicensed company to commercialize the now-proven technology in local or regional markets.

The R and D business model can greatly reduce investor risk by focusing on technology validation and securing IP rights. This allows the constrained venture funding pool in Hawaii to fund more companies to develop more innovative technologies with the small amounts of venture capital available. The research activity also fits squarely within the qualifying guidelines for the 100% high tech investor tax credits in the next year and a half, which will help to reduce investor risk. So, far from gloom and doom, our R and D companies can now focus on their real business mission and hopefully thrive.

Saturday, June 13, 2009

What Do Patent Attorneys Really Do?

My clients often wonder why they need a patent attorney? Many of them do a great job of documenting their inventions in writing, handing me 10-20 pages of written technical explanation complete with drawings. Why, they ask, do I insist on putting the invention description in a certain order, focusing on certain technical issues while ignoring their “big-picture” marketing verbiage, using certain buzz words like incantations, and keeping the drafting of patent claims off-limits to them? It is difficult to explain to each client while in the drafting process why patent attorneys do things in their mysterious ways. So as a general overview for technology developers, I will attempt to explain some of this mystery in layperson’s terms.

A Patent Is An Integrated Legal Document
This means that the patent document by itself must provide a complete explanation of the invention you are attempting to patent. It is also the document that establishes to the public exactly what you have invented. You will not be allowed to change or add anything material or to come in with a late explanation after the patent application is filed. If a crucial link in the chain of explanation is missing, the patent application may be rejected by the Patent Office for insufficient disclosure. Even if it is granted, the patent may be challenged by anyone over its 20-year term on the basis that something important for practicing the invention was left out or something you made a big point about turns out to have been erroneous or misleading.

It Must Define What Is New Over All That Is Old
The key to getting a patent granted and to defending its validity over its 20-year term is to accurately identify what is new over all that is old. What is old is everything that has been published in the U.S. and elsewhere in the world prior to your filing date. It does not matter that a prior product was not a market success, that a prior patent describes something obsolete when read 5 or 10 years later, or that a prior article or paper was not followed or endorsed in the industry. The Patent Office will use each prior art reference as indicative of what it teaches or suggests. If the inventor is an expert in the field of the invention, then the patent attorney should require the inventor to explain what was already known in their industry and how the invention differs from that. If the inventor is not an expert, it is advisable to at least have a patent search conducted. While patents are only a narrow slice of the world’s technical literature, companies tend to file for patents when something new is created that may have commercial value, so a patent search may be a good indicator of the state of knowledge in that industry.

Why Does The Patent Attorney Keep Repeating Things in the Application?
An experienced patent attorney is expert at identifying from a technical background description or a patent search what should be emphasized as being new about an invention. The patent attorney will repeat this in at least 3 different places in the patent application (Summary, Description, Claims) to make certain that the point is made. This is especially useful years later when the patent is challenged in court, and the attorney for the other side is showing many prior art references to the jury that were not found in patent examination to invalidate your patent. Because the patent keeps repeating what is new, the attorney defending the patent can more readily differentiate for the jury the invention over the prior art references by pointing to those sections in the patent that keep emphasizing what is considered to be new.

Why Is Comparative Test Data Needed to Support The Invention?
A patent must not only explain what is new about the invention, it must also present a strong argument why the invention is “non-obvious” over all prior knowledge. “Non-obviousness” is a legal requirement for patents that the invention not be something a person of ordinary skill in that field (an engineer) would have thought of given all that was known to be old. That is, the invention must be shown to involve a “discovery” or “leap of imagination”, not just routine engineering. This showing must be made in the patent application, or else a patent examiner may not be convinced and will reject the application. While the point can be raised as an argument later, the patent examiner will not allow you to read anything into the application that was not there as of its filing. Also, once examiners form an opinion as to obviousness, it may be difficult to dissuade them with late arguments. “Non-obviousness” can be shown by quantitative evidence of a critical difference or advantage that the invention obtains that the prior art does not. Comparative test data that illustrates this critical difference or advantage can be very persuasive. You can also show non-obviousness by showing how the invention solves a problem that the industry did not recognize, or takes an approach to problem-solving that is opposite from what the industry followed.

Why Does the Patent Attorney Ask for Other Versions of the Invention?
As they say in math, a point is only a singularity, two points make a line, three points make a plane, and four points make 3D space. If you show two different ways to implement the same invention concept, the examiner and the public can infer that you are entitled to patent all other versions lying between those two, or three, etc. This shows that you are entitled to a broad reading of your invention claims. Also, if the patent examiner finds a prior art reference in examination that knocks out one of your versions, then you can shift your patent claims to focus on the other version and still get a patent granted.

Why Is It Important to Show Each Step in the Invention System or Method?
The basic exchange for a patent is that the Government grants you a 20-year monopoly on specific technology, but you must teach the public (in the patent document) how to implement that technology without the public having to guess about it or to invent it for you. In this manner the progress of patent filings records, and therefore advances, the progress of technology. You are not allowed to hold back the critical linchpin that makes the whole thing work, or to leave out the “secret sauce”. If you do, the patent may be challenged at any time as invalid. You do not have to describe every detail of other parts that are not what is new about the invention. But if you are asserting what is new, then you must specify each step that you have conceived to implement it.

What If My Development of the Invention Is Only At the Prototype Stage?
Every patent filing is a snapshot in time that becomes dated by the end of its 20-year term. You can assume that this will be the case. No one expects an inventor to describe an implementation of the invention that will still be in use 20 years from now. However, what you do describe in the patent as the invention must be complete enough in design and operation that the public can understand by reading the patent how to implement the invention, even if they may use other components later that perform the equivalent function. The trick is knowing when an invention has been completed in conception and reduction to practice, even if it exists now only as a prototype. This is where the patent attorney’s judgment is important. If a critical step of implementation is missing, the patent attorney will flag it as a place for you to fill in.

Why Do I Need to Describe the Nitty-Gritty Details? Will I Be Limited By Them?
Patent attorneys like to build at least one, if not more, technical “fallback” position into the patent application. That is, if the examiner in patent examination finds prior art that shows or suggests your overall invention concept, your broad claims may be rejected. However, if there is a more specific implementation detail not shown in the prior art that is described in your example of the invention, then you may be able to narrow your patent claims to limit the definition of your invention to that particular form of implementation, and thereby still get a patent. The patent claims are separate from the description of the invention. You are entitled to the broadest patent claim on your invention that does not overlap on what is old (the prior art). So the nitty-gritty details described in your example do not limit you. They are only there to afford you an option to narrow your patent claims if prior art is found that knocks out the broad concept of your invention.

Why Does the Attorney’s Patent Claims Sound So Weird?
Patent claiming is a true art form, and is the main reason to justify why you hire a patent attorney. It is the first part of a patent attorney’s training. The patent claims are written now, but hopefully will cover the many ways others may want to use your invention 20 years into the future and with other components developed in the future. To do this, a patent claim must be drafted as a fine balance between defining enough specific and definite details that the invention can be differentiated from the prior art, while at the same time it must not include any unnecessary language that limits the patent coverage in ways that are not essential. Basically, the patent attorney must craft the claims to include only necessary details and omit all unnecessary details, and do this while guessing how things may change in the future. In addition, patent claiming must follow a number of rules of formatting, such as: (i) a patent claim must be written as a single nominative phrase (I claim a …); (ii) "comprising" means "including, but not limited to", whereas "consisting of" means "including these only and no others"; (iii) a term cannot be indefinite as to what it specifies (… an applet … (not a widget and/or an applet)); (iv) indefinite articles are terms of inclusion (an applet … including an applet pair), while definite articles are terms of exclusion (said applet … (and no other)); etc. These drafting strategies and rules are designed to make parsing what a patent claim covers or does not cover 20 years into the future an exact process that minimizes uncertainty.

Hopefully, the above will enable you to understand what your patent attorney is doing, and why these fine points may be important for your patent over the long term.

Tuesday, May 5, 2009


I’ve wondered why, with our HCEI goal to convert from 90% foreign oil dependency to 70% renewable energy use by 2030, there have not been more Hawaii companies working on innovations in renewable energy. As my own innovation stimulus, I am offering this INVENTION CONTEST for anyone to come up with new, useful and nonobvious solutions to the following 3 invention starter ideas. The winner in each category will be announced on my blog site and receive my coveted “GOLDEN BAGEL AWARD” for best Hawaii intellectual property achievement of the year. The award is well-recognized by those in the intellectual property field in Hawaii and will serve as a credential that can attract funding from investors and support from business and professional service providers in Hawaii. As an added bonus for the 3 winners chosen in the Invention Contest, I will perform a FREE patent search on each invention and provide my written opinion on its patentability (a $1500 value).

So here are the 3 invention starter ideas:

1. MASHUP OF WEATHER RADAR IMAGES AND GOOGLE EARTH TO CONTROL SMART PV POWER GENERATION SYSTEM: The National Weather Service of NOAA provides real-time radar images of weather and cloud patterns over the U.S. ( If weather radar images of clouds can be mashed up with Google Earth maps of specific locations, then one can predict when clouds will pass over a PV facility location so that the output of the PV facility can be conditioned (with energy put in and out of storage) to avoid sharp output swings to the grid or any connected power network.

2. ON-SITE MODULAR APPLIANCE CONTROLLERS USING POWER LINE SIGNALLING: Prior developments have shown how to send data signals over a 60-cycle power supply line to connected terminals. If a smart controller for a home PV array could turn down appliance usages when clouds are expected to pass over the site (see Item #1 above), then backup power would not need to be purchased from the grid at full retail price. Why not create a standardized module that plugs in-line between an appliance cord and a wall socket and can be programmed to mimic remote control signals to turn up or down the energy usage of the appliance? For example, a signal can be sent to turn up or down the thermostat for an A/C unit, light dimmer switches, electric appliances, etc., depending on the expected direction of PV array output.

3. WIND TURBINES FOR UTILIZING HIGHWAY WIND TUNNELS: Zooming cars on highways generate high wind tunneling along the directions of traffic. Why not put up aesthetically pleasing arrays of axial wind turbines on highway fencing that can turn the wind tunneling into electrical energy for storage in on-site batteries to power roadside emergency devices, signs and street lights?

Contest Rules

This contest is being offered on May 5th (Cinco de Mayo) to celebrate our hope for freedom from having our local economy colonized by foreign oil producers. Submissions must be submitted by email dated by noon July 4th, Independence Day. This contest offer is limited to participants residing in the State of Hawaii as of the date of submission.

Submissions must be in the form of a pdf file sent to my email address below containing: (1) a printout of this contest offer with acceptance of its terms and conditions signed and dated by the actual inventor/participant, and listing their residence address; and (2) an overview description of their new, useful and nonobvious solution for any of the above invention starter ideas (text on no more than 2 letter size pages accompanied by no more than two drawing figures).

I will review the submissions and determine (in my sole judgment and discretion) a winning entry of the best invention solution for each invention starter idea, as well as all runners-up who send in qualifying submissions. Submissions will be kept confidential by me unless publicized by the inventor or otherwise published. Winners and runners-up will be announced by September 7th, Labor Day. The presentation of the Golden Bagel Awards to the winners will be scheduled later in the year.

I recommend that those participants who believe they have come up with unique inventions that may be commercially valuable seek to protect them by filing for patents if warranted. As the contest judge for all submissions, I will not handle patent applications for any contest participants, but I refer those seeking to patent to any of the other qualified patent practitioners we have in Hawaii. I invite those qualified patent practitioners in Hawaii to identify themselves to the contest participants by sending a comment to this blog entry.

Those seeking to patent should file their patent applications before May 5, 2010, in order to avoid any prior art effect in the U.S. that might arise from publication of this contest. I am dedicating the 3 invention starter ideas to the public domain and waive any claim to co-inventorship with contest participants. Those who file for patents should claim as their inventions only their own new, useful, and nonobvious invention solutions, and not the starter ideas themselves.

To promote my proposal for a “patent-free zone” for renewable energy technology in Hawaii (see my February 1 blog), any participant submitting a qualifying entry in this contest shall agree to share a non-exclusive, royalty–free license under any U.S. patent they may obtain with all other qualifying participants in this contest, of the right to make, use, or sell, in the State of Hawaii only, the invention solution they submitted in this contest. In this way, inventors responding to an invention starter idea cannot sue each other over patent rights on their invention solutions in Hawaii. Participants who obtain patent rights are free to license and/or enforce such patent rights outside of the State of Hawaii if they so choose.


Contest Participant:

Dated: ____________________

Submission Accepted as Qualifying for Contest:

Leighton K. Chong, Contest Master

Dated: ____________________

Monday, April 6, 2009

The Time is Right to Locate a Regional Patent Examining Office in Hawaii

The U.S. Patent and Trademark Office is the Federal agency responsible for granting U.S. patents and registering U.S. trademarks. It advises the President, the Secretary of Commerce, and U.S. Government agencies on intellectual property (IP) policy, protection and enforcement; and promotes stronger and more effective IP protection around the world.

The USPTO’s annual budget of about $2 billion is supported by fee revenues generated from patent and trademark examining operations. Since 1992 Congress had been diverting agency fees of up to $100 million per year for deficit reduction in the general budget, a practice which has been curtailed in recent years. As a result of this fee diversion, and due to missteps in its decade-long modernization efforts, USPTO operations have become mired in increasing disarray. Examination and issuance of patents have been pushed back from a target pendency of 18 months from filing to over 36 months and longer. There are over 1,000,000 patent applications on the docket awaiting examination, and with over 450,000 applications being filed annually and expected to grow by 8% per year, the delays in pendency are widening.

The USPTO faces ever more serious challenges ahead. The increasing number and technical complexity of patent applications, coupled with the many challenges of hiring, training and retaining patent examiners, continues to confront the USPTO. Examination based on “prior art” resources has not kept pace with the explosion of bibliographic and references sources becoming available in multi-languages throughout the world. With understaffed and overworked examiners struggling to stay abreast of the growing avalanche of pending cases, confidence in the quality of issuing patents has steadily eroded. The Office’s current level of 9,500 employees (of which 6,000 are examiners) needs to be expanded significantly to catch up with its growing backlog of patent cases.

As stated in its Strategic Plan for 2007-2012 operations, the USPTO has as its primary strategic goal the optimization of quality and timeliness in its patent examination operations. It has identified the following key strategies to achieving this goal:

1. Enhance recruitment to hire 1,200 new patent examiners a year to 2012 and beyond, including examiners with technical degrees in emerging technology areas.
2. Expand telecommuting and explore establishing regional USPTO offices.
3. Expand its Training Academy to enhance the training of new examiners.
4. Explore partnerships with universities to offer IP courses to science and engineering students, and develop internship programs to train students in IP matters to create a ready pool of potential examiner candidates.
5. Adopt steps for retention of examiners with special skills, and experienced retirement-eligible managers and examiners (versus the current 95% turnover of examiners within 4 years).
6. Provide assistance to industry and research communities to develop additional databases for examiners to access potential prior art for examinations.

In May 2007, at the invitation of Governor Lingle, USPTO officials attended an international conference with the commissioners of the other major patent offices (Europe, Japan, Korea, China, and Australia) in Honolulu, and while here held a discussion with Hawaii officials and members of industry and the patent bar to explore the possibility of helping to meet the Patent Office’s strategic goals by opening a regional patent examining office in Hawaii. At the meeting, the following advantages of locating such an operation in Hawaii were noted:

1. Hawaii has a large, ethnically diverse pool of U.S. citizen science and engineering graduates and pool of expat graduates seeking employment in Hawaii estimated to total at least 1,600 per year.
2. The USPTO’s federal pay scale (with COLA and hiring and retention bonuses) is 30% higher and more compared to the average pay levels for Hawaii’s tech jobs.
3. Due to the higher pay and their desire to work in Hawaii, the retention rate for Hawaii hirees for patent examining positions at a Hawaii regional office is expected to be very high.
4. Hawaii’s universities and research centers excel in emerging science areas of increasing importance, such as biotechnology, agricultural technology, ocean and earth sciences, telemetry, communications, dual use defense technologies, and renewable energy.
5. Hawaii is an ideal venue for a far-west presence of USPTO operations, and for Asia-Pacific conferences on international patent and intellectual property policies.

A Hawaii regional patent examining office might start with an initial hiring of 50 – 100 new patent examiners to be trained by senior supervisory examiner trainers relocated or rotated here from the USPTO, staffing up to a corps of perhaps 500 examiners or more in 5 years. The examiners could be hired principally in science areas matched to Hawaii’s areas of technology excellence, but would be assigned patent cases from all over. The examiners’ progress through the USPTO’s training regime and examination operations in the first 2-3 years would need to be supervised at the regional office location, but senior examiners could later expand office operations by telecommuting from home offices. The regional office may require in the range of 40,000 square feet of leased space, for classrooms, large seminar rooms, examiner offices, and telecommunications facilities. A lead agency such as PICHTR, with experience in setting up training and advanced technology projects in the State, could be tapped as a local counterpart to work with USPTO training and office facilities personnel.

A Hawaii regional patent examining office would also be able to establish broader synergies with the Patent Office and with local technology and research communities. It would bring prestige and increased patent and IP awareness to Hawaii as an innovation center. Our universities would be invited to work in partnership with the USPTO to offer IP courses to science and engineering students, develop examiner internship programs, and provide career counseling for tech graduates as potential examiner candidates. Foreign science and engineering students (non-citizens) in Hawaii can also participate in external operations ancillary to the USPTO, such as for foreign technical translation of examination resources. For the USPTO, the Hawaii regional office would establish a far western presence for promoting U.S. and international patent and intellectual property policies. The regional office would also make Hawaii more visible as an Asia-Pacific venue for international patent and IP conferences.

With President Obama and his Administration taking a new trade policy focus toward Asia, the new Secretary of Commerce Gary Locke being more trade-oriented, and a new Director of the Patent Office about to be appointed, it is time to revisit the proposal to locate a regional patent examining office in Hawaii. The USPTO Strategic Plan and goals line up perfectly with the advantages Hawaii offers in terms of a large available pool of examiner candidates, high job attractiveness and retention, supporting universities and research centers, a far western presence in the United States for the USPTO, and an international conference venue on patent and IP policies.

Sunday, March 1, 2009

A Hybrid Business Model for Renewable Energy Companies in Hawaii

In my Feb. 8 blog article, “An ‘Unfair Advantage’ for Hawaii R&D Companies in Renewable Energy Technology”, I proposed that a hybrid business model for R&D companies in renewable energy technology partnering with a developer of an on-site RE power producing facility can provide significant advantages over the typical venture business model. This blog article explains in more detail how the hybrid business model for Hawaii RE companies would work.

The typical venture financing model for startup technology companies in Hawaii has been structured around lowering risk by taking advantage of the State’s 100% investment tax credits (Act 221/215). With a Hawaii average of $5 million funding for a promising deal, the company will staff up with a senior management team, rent office and lab space, and employ an engineering team, product development team, and marketing and sales teams. It typically has a burn rate of $100,000 per month, expending its funds in 4 to 5 years. But Hawaii tech companies seldom can attain market visibility or anywhere near their projected sales targets due to the previously mentioned “perfect storm” of disadvantages they labor under. Making a case for further venture funding then becomes extremely difficult. If the company has not gained enough traction to ramp up product sales to at least break-even levels, it goes into “life-support” mode until the 5-year tax credit recovery period is completed. The Hawaii investors are deemed adequately compensated by the tax credits, and the Mainland investors can try to recover value from the company’s remaining assets, typically its intellectual property and patents.

In contrast to the venture financing model, Hawaii companies developing a new renewable energy technology can use a hybrid business model that provides significantly better results for the company and its investors. Instead of a business plan based on ramping up to unreachable product sales, the Hawaii company in the hybrid business model is formed as an R&D company that will conduct a validation stage of research on a new RE technology with a dedicated customer such as a developer of an on-site photovoltaic (PV) power producing facility. The PV facility is set up to pay for its installation costs separately through federal and state RE tax credits and low-interest-rate debt financing which is more than covered by the expected energy savings.

The R&D company acts as operating manager of the PV facility and researches a “smart” energy management system that can maximize efficient energy usage of the PV facility. Raw PV arrays and windfarms produce power that fluctuates intermittently with changing cloud or wind patterns. Due to hysteresis effects, the fluctuations result in usable energy output less than the facility's real-time generating capacity. The customer/developer would need to make up for power fluctuations by buying electricity from the grid at full retail price plus utility-imposed standby-power charges. If a “smart” energy management system can be devised to squeeze out a 30% increase in energy usage of the facility and minimize the need for backup grid electricity, the R&D company can both validate the technology and justify the installed cost of the “smart” energy management system.

Since the R&D company has access to a full test bed facility, and since its business plan is not based on product sales, there is no need to staff up a senior management team, product development team, or marketing or sales team, or pay for office or lab space or product manufacturing. All investor funds can be used primarily for hiring an engineering team and performing the R&D work. Therefore, the R&D company needs to raise perhaps only in the range of $500K in the validation stage of their new energy management technology. This level of funding is within range for a Hawaii angel investor, and should fully qualify for the 100% Hawaii investment tax credits, and the State's 20% refundable business tax credit on qualifying R&D expenses ($100K on $500K research expenses). Since the test system is to be used for energy efficiency purposes at the developer’s site, the installation costs should also qualify for immediate 65% federal and state RE credits on installed costs.

If the test system proves effective in providing energy cost savings to more than justify its installation costs, the R&D company can then sell the proven system at cost to the customer/developer after the 5-year tax recovery period and distribute the proceeds to its investor(s). Counting Hawaii investment tax credits, federal and state RE credits, and recovery of facility costs, the cumulative payback to the Hawaii angel investor(s) would total at least 165%+ return (net present value) on investment (assuming half the funds are spent on installed equipment and the other half on engineering salaries). The Hawaii angel investor would also retain a larger, undiluted equity share for full upside participation if the R&D firm can now profitably commercialize the now-proven technology.

The R&D company would own intellectual property rights in the developed energy management technology in the form of copyright-protected software, patented invention rights, and/or licensable engineering know-how. It can monetize these intellectual property rights by seeking to license the technology to established RE facilities installation companies in the Mainland U.S. and globally. Alternatively, it can now credibly seek the next stage of venture capital funding for expansion of the company to commercialize the now-proven technology for sale in Mainland U.S. and global markets.

The hybrid RE business model can greatly reduce investor risk in the technology validation stage, and lessen the burdens on the company for early fund raising. It also allows the constrained venture funding pool that exists in the State to fund more companies to develop more innovative approaches to RE technology that would make achievement of the State’s ambitious goal of 70% renewable energy use by 2030 more likely. Last, but not least, the hybrid RE model would slow down the rate of saturation of wealthy investors for and defer usage of the State's investment tax credits until the RE technologies have proven their commercialization potential.

Sunday, February 15, 2009

Legal Issues of Making Hawaii A Patent-Free Zone For Renewable Energy Technologies

Respondents to my earlier blog “Should Hawaii Be A Patent-Free Zone For Renewable Energy Technologies?” have raised the question, “Why limit patent-free use of renewable energy technologies in Hawaii to research grantees? That would leave out non-grantee patentees and out-of-state patentees. Why not pass a State law to exempt renewable energy technologies from patents State-wide?” This blog will outline some of the legal issues involved.

The U.S. Patent Laws are a federal statute implemented under authority of Article 1, Section 8, of the U.S. Constitution granting Congress powers (inter alia) … “To promote the progress of science and useful arts, by securing for limited times to … inventors the exclusive right to their … discoveries.” No state can enact legislation which contravenes or interferes with the U.S. Patent Laws under the well-established constitutional doctrine of Federal Pre-Emption. Therefore, the State of Hawaii cannot enact a state law that would contravene or interfere with the U.S. Patent Laws.

Enactment of any state law that would allow use of a patented invention without just compensation would probably also run afoul of the Due Process Clause of the Fourteenth Amendment to the Constitution, that “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of … property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

The U.S. Patent Laws could be amended to modify provisions for patents on renewable energy technologies in the United States. However, this would require hearing, debate, and passage through both houses of Congress, and therefore must be legislation that would be favored by Congress as consistent with national patent policy.

Another approach might be to invoke immunity from patent suits under the States’ Immunity Clause of the Eleventh Amendment to the Constitution, that no suit may be “commenced or prosecuted against one of the … [states] by citizens of another state, or by citizens or subjects of any foreign state”. However, in order to pass muster under the Constitution, prior Supreme Court precedents indicate that a state must demonstrate that compulsory licensing of patents is necessary to achieve an overriding state purpose, the state must create a state agency to own the facilities as to which it will invoke immunity, and it must offer procedural and substantive due process of providing “just compensation” to the patentees of infringed patents. These requirements may be too complex and onerous for a state to implement.

As suggested in my prior blog, perhaps the quickest and most effective way to create a patent-free zone for renewable energy technologies in Hawaii would be to have grantor agencies for renewable energy research implement a policy of offering grantees to voluntarily exchange a non-exclusive royalty-free license to use any patented technology in Hawaii developed under research grant funding in exchange for a similar license to them to use those of any other grantees. This would be a simple “quid pro quo” for receipt of grant funds, and would probably be of most benefit to the grantees themselves. It would be entirely consistent with grantor agencies’ policies to promote cooperative and effective research efforts on renewable energy in Hawaii.

The shared patent licensing pool can be expanded by encouraging State agencies to join the pool, for example, by having the University of Hawaii and the Hawaii Natural Energy Institute renegotiate appropriate incentives for patent royalty sharing with its researchers to offset potential loss of patent revenues due to royalty-free use in Hawaii. Private companies doing renewable energy research, as well as Hawaii's utility company HECO, could also be encouraged to join the patent-free licensing pool since they have far more to gain by eliminating legal costs and roadblocks to deploying RE technology than they stand to lose in patent revenues foregone in Hawaii. Even out-of-state patentees might find it advantageous to join the patent-free licensing pool and make profits by selling RE products and systems in the State without roadblocks from patents owned by others.

** For full disclosure, Leighton Chong has handled patent matters in renewable energy technologies for the University of Hawaii, Office of Technology Transfer & Economic Development, Hawaii’s utility company HECO, and private renewable energy companies in Hawaii and on the Mainland.

Sunday, February 8, 2009

An "Unfair Advantage" for Hawaii R&D Companies in Renewable Energy Technology

Hawaii tech companies are typically underfunded by a factor of 1/5 to 1/10 what their Mainland counterparts can command for the same venture proposal. At the same time, Hawaii tech companies need to offer compensation competitive with the Mainland to attract senior company officers for assurance to venture capital investors. Often key technical employees also need to be hired from out-of-State. Hawaii’s geographical remoteness from enabling business infrastructure, alliance partners, and distribution channels, along with high transportation costs, all combine to limit product sales to Hawaii’s small domestic economy (1/300 of Mainland GDP), as low levels of venture funding would make a national or global sales effort unattainable.

However, the renewable energy (RE) technology sector in Hawaii may finally reverse this decades-long “perfect storm” of disadvantages, perhaps even giving our RE tech companies an “unfair” advantage over their counterparts in other states. Based on mostly fossil-fueled power generation, our electricity rates are the highest in the nation, hitting 31 cents/kwh in October 2008 and still holding at around 19 cents/kwh, compared to a Mainland average of about 11 cents/kwh or less. This means that there is a strong economic incentive for our local businesses to install RE power generating facilities at their business locations to save on utility costs. Even at $8,000 to $10,000 per installed KW of generating capacity, they can save on utility costs more than enough to pay back on long-term (15 to 25 year) debt financing for the facility, taking into account the 65% return in RE tax credits (35% Hawaii, 30% Federal) that the project owner gets on the installed costs of the facility. When the PUC issues its rulemaking in mid- to late-2009 on feed-in tariff rates for selling excess RE-generated power back to the utility, many if not all commercial and industrial users in the State should seriously consider installing some level of solar PV or other RE power generation facilities at their business sites.

At the same time, the new forefront in RE innovations in Hawaii is not in “big-science” discoveries of exotic new materials or processes to achieve higher RE conversion ratios (which typically take decades to perfect and bring to market), but rather in near-term, practical energy efficiency improvements, “smart” energy usage management, on-site storage optimization, new user interfaces to a “smart” utility grid, etc. A tech company can partner with an RE facility owner to use the already-financed RE power generating facility as a test bed for conducting R&D on a new energy efficiency or “smart” energy management technology. Such targeted R&D on non-fossil-fuel energy technology and/or advanced software-based energy management controls should readily qualify for the State’s 100% investment tax credit and 20% refundable R&D business tax credit, even if the Hawaii investor tax credit law (Act 221/215) is amended to remove certain abuses during the current legislative session.

The anatomy of a new hybrid business model for an R&D leveraged company in renewable energy technology in Hawaii might look like this. The R&D company can partner with the owner of an RE power generating facility as a test bed. As an example, current electricity costs can justify a $3 million debt financing to pay for a 300 KW capacity, solar PV system (such as the recent installation for Tony Group Autoplex reported in the Honolulu Advertiser) as a self-amortizing business loan to be repaid over 25 years from the expected savings on utility costs, with close to $2 million in renewable energy tax credits off State and Federal tax liabilities. As a partner in the R&D work, the project owner may be given a percentage of company stock, the continued use of any successful energy efficiency or energy management system tested at their site, and/or a percentage of profits on any technology successfully proven and later commercialized by the R&D company.

The R&D company now only has to raise perhaps $500K in venture capital to test their new energy efficiency or energy management technology at the test bed site, instead of having to raise an additional $3 million to build the test bed site. Since the venture investment is specifically for R&D activity which qualifies under the Hawaii tax credit law, the investors in the R&D company will get back their $500K in State investment tax credits, and the R&D company will also get a business tax refund of up to $100K from the State for the amounts it expends on qualifying R&D costs. By having to raise only 1/7 the venture capital financing than if they had to build the test bed site, the R&D company can now focus all of the raised funds on its R&D activity, and avoid the high costs and time distractions of raising a 7x larger venture financing, hiring senior company officers, and diverting scarce venture funds into product manufacturing, distribution, marketing, sales, and customer service.

If the R&D company is successful in developing a new energy efficiency or energy management system, it can transfer the system at cost to the facility owner to continue receiving the energy savings benefits off utility costs. The R&D company will own any patent rights, copyrights in software, and other intellectual property (IP) rights in the system which they can then exploit commercially throughout the Mainland U.S. and globally, either through licensing or by then seeking venture capital financing for expansion of their company to commercialize their now-proven technology.

Monday, February 2, 2009

Should Hawaii Be A "Patent-Free Zone" For Renewable Energy Technologies?

Patents are sought by inventors to secure exclusive legal rights in their inventions. For a patent to be granted, the invention must meet a high standard of being "new" and "nonobvious" over all prior published knowledge cited in Patent Office examination and in any subsequent legal challenges. Once granted, a patent provides the inventor with exclusive rights for a limited term of 20 years from filing within which to try to derive profit from their invention. A principal requirement of the patent system is that the inventor provide a complete disclosure to the public in the patent document of how to do something that was not known before in exchange for grant of a 20-year patent monopoly.

However, the U.S. patent system has been increasingly criticized as imposing heavy transaction costs and creating legal frictions that stifle competition in industries due to what some economists refer to as "excessive rent-seeking behavior". Defending against patent infringement claims can impose heavy legal costs on companies seeking to develop new products in areas where others have obtained prior patents. Also, in seeking to maximize the acquisition of patent rights, typical company policies require company research to be kept secret until patents are applied for.

In certain fields of cooperative research requiring the participation of multiple parties, such as in long-term medical research or joint university research, it is common to form research consortiums to jointly manage or pool together patent rights in order to remove ownership and enforcement issues as obstacles to sharing research work among participants. Also, in circumstances where multiple parties must develop and optimize different parts of a complex system, such as occurred in the development of digital television and microprocessors, allowing component developers to be licensed under collective patents for the whole system can remove the legal friction that might otherwise occur from the assertion of patent rights between contributing parties.

The State of Hawaii, in partnership with the U.S. Department of Energy, has set ambitious goals (the "Hawaii Clean Energy Initiative") to convert its current, almost total dependency on imported fossil fuels to 70% renewable energy usage by 2030. To accomplish this, many new or improved renewable energy (RE) systems, processes and products must be developed, optimized, and deployed widely in the State within the 20-year timeframe. This will require cooperation in research in diverse fields among multiple parties, as well as the removal of legal frictions between multiple contributors to complex systems.

I suggest that renewable energy policy agencies in Hawaii should consider making Hawaii a "patent-free zone" for renewable energy technologies. Since much RE research will be funded at least in part by research grants, implementing a "patent-free zone" policy can start by grantor agencies adopting a policy to retain shared patent licensing rights for all grantees to use any RE technology developed in whole or in part under research funding received from those agencies.

Companies can still file for their own patent rights to keep their investors happy, but would be able to license or enforce them only outside Hawaii. Since Hawaii's economy is relatively small in relation to national and international markets, the loss of possible licensing revenues foregone in Hawaii would be relatively small, while the benefit to all companies working toward the State's renewable energy goals would be large.

As an example, the Federal Government already requires retention of a royalty-free non-exclusive license under the Bayh-Dole Act when it allows small companies to take title to inventions funded under government research grants such as SBIR and STTR. The Federal Government will only exercise its access rights if the patent owner does not or can not commercialize a patented technology that is needed within a relevant industry.

As a parallel example in the State of Hawaii, the Hawaii Renewable Energy Development Venture (HREDV) has been set up through PICHTR as a central coordination agency for channelling federal funding for RE research in Hawaii. HREDV would be well-positioned to institute a "patent-free zone" policy by retention of licensed access rights to RE technologies developed by companies receiving research grant funding. Since it is a private industry organization, HREDV could implement such a policy without requiring the passage of legislation. It can also serve as an example or starting point for State-funded research entities like the University of Hawaii and the Hawaii Natural Energy Institute, and private companies in renewable energy research and Hawaii's utility company HECO to join the "patent-free zone" policy.

With at least the main clusters of RE research in Hawaii implementing a "patent-free zone" policy, all participating companies can freely cooperate on RE research in Hawaii knowing that they will not be blocked from using whatever they have contributed, thereby promoting shared research and removing legal frictions to help attain the State's renewable energy goals.

Saturday, January 31, 2009

Gaining Host Community Approval for Renewable Energy Facilities

Local opposition to siting renewable energy facilities has the potential to derail Hawaii’s ambitious goals for converting to 70% renewable energy use by 2030. Power generating facilities of significant capacity (e.g., over 1 MW), such as large windfarms, solar photovoltaic arrays, and biodiesel conversion plants, can impact residents view planes, create noise, occupy large land areas from other uses, emit trace odors or fumes, etc. The State has partnered with the U.S. Department of Energy in the “Hawaii Clean Energy Initiative” (HCEI) to showcase Hawaii as a leader in renewable energy usage. Besides keeping $18 billion a year at home that would otherwise be spent for imported oil, achieving HCEI goals would create thousands of high-skilled “green collar” jobs. But implementation of these goals will require siting many new renewable energy facilities near resident communities across the State, so the big question now is, “How do we achieve these goals?”

A useful example of how to address potential local opposition due to siting impacts is the Payments for Ecosystem Services (“PES”) model developed by the United Nations Environment Programme (UNEP) and used in recent years by the World Bank and Asian Development Bank for siting infrastructure projects in environmentally sensitive areas in developing countries. The PES model is used to promote equitable benefit sharing and sustainable resource management with communities that host development projects that impact their environment. In the PES model, the ecosystem host community negotiates an equitable agreement with the project developer to share in the economic benefits of a project, as recompense beyond the usual considerations of facility design, operation, amenities, and impact mitigation.

In a similar manner in Hawaii, communities that are hosts to renewable energy power generating facilities that impact their environment can share in the benefits with the utility company or project developer. Benefit sharing can be readily implemented through the convenient vehicle of applying discounts to metered electricity rates for residents in the host communities. This approach, which I call “Metered Benefit Sharing”, allows host communities in effect to partner with the utility company or project developer by sharing in the economic benefits of renewable energy power generating facilities sited in their communities. By encouraging communities to become proactive consumers (“prosumers”), Metered Benefit Sharing can change the so-called NIMBY syndrome (“not-in-my-backyard”) into PIMBY (“put-in-my-backyard”) cooperation.

The State Legislature should give the Public Utility Commission statutory authority to study the use of Metered Benefit Sharing, which might be used to change the attitudes of host communities to enable widespread siting of renewable energy generating facilities within the 2030 timetable for achieving the State's ambitious renewable energy goals. While sharing in the economic benefits, Hawaii residents can do their part to reduce imported oil costs and supply risks for all energy users in the State and promote the economic health and sustainable future of the State as a whole. For developers and investors, the Metered Benefit Sharing model can mitigate or eliminate risk that a project will be derailed, giving them an incentive to participate in achieving the State’s renewable energy goals.