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Funding fusion could be the key to clean energy

A $10 billion fusion fund might make carbon-free energy a reality, says Professor Andrew W. Lo

By Kathryn M. O’Neill  |  January 26, 2017

2017-Lo

Andrew W. Lo

The major barrier to meeting the world’s clean energy needs isn’t scientific or technical; instead it’s financial, said MIT Sloan Professor Andrew W. Lo.

Fusion, the type of nuclear energy that powers the sun, offers the promise of clean, safe, and plentiful carbon-free energy—but it has not yet proven to be practicable.

“What will it take to get to 50 million degrees and three atmospheres of pressure in seven seconds?” Lo asked, naming the technical requirements experts have outlined as necessary to fusion’s success. “I know one thing it’s going to take, and that’s financing.” Specifically, $10 billion.

Lo, who presented on “New Financing Models for Funding Fusion Energy” Jan. 23 at the MIT Plasma Science and Fusion Center, noted that in September 2016, as the center reached the major milestone of setting a world record for plasma pressure, funding for the experimental device involved ran out.

“I was completely outraged by that [lack of funding],” Lo said, emphasizing that clean energy is necessary to meet the demands of the ever-growing human population. “We need finance because we need to … motivate people to action.”

Lo, who is also the director of the MIT Laboratory for Financial Engineering, drew a parallel between the difficulty of funding fusion and that of fueling the pharmaceutical industry. In both cases, he said, research is expensive and success is far from guaranteed. The basic economics of a cancer-fighting drug, he said, is that development takes $200 million over 10 years with just a 5 percent probability of success.

Given this high-risk environment, how do pharmaceutical companies get investors? “We use financial engineering—multiple shots on goal, to use a hockey term,” he said. As an example, he noted that if 150 independent projects are pooled together, each with a 5 percent probability of success, the odds that three of them will pay off within 10 years is over 98 percent.

Those odds are attractive enough to investors that a fusion fund with this structure could raise money from bond markets, which are two orders of magnitude larger than private or public equity markets, Lo said. However, it is critical to ensure that there is no correlation among the projects, because correlation significantly reduces the overall probability of success. Fusion researchers will also need to identify distinct projects and determine what stakeholders are likely to benefit from research outcomes.

As a financing mechanism, Lo proposed a $10 billion fusion fund in the form of a private-public partnership guided by a board of advisers. The fund would partner a nonprofit academic consortium with a for-profit fund backed by investors.

While scientists might find it challenging to work on parallel, rather than sequential projects, Lo maintained that pursuing many projects at once would be the best path forward for fusion—as it has been for pharmaceuticals.

“We’re only asking for $10 billion for fusion to fuel the rest of the human race,” Lo said. “I would argue we can’t afford not to try.”