It was a fair question for the moderator to ask Bill Gates what he was doing on stage at the third annual Energy Innovation Summit hosted by the Department of Energy’s Advanced Research Project Agency-Energy (ARPA-E).

“If you look at the improvement of the human condition, it’s related to intensity of energy use,” Gates answered. To help raise the standard of living for the world’s poorest billion people, he argued that we need to find a way to use energy in a way that’s smarter, cleaner and more efficient.

And so began a chat between Bill Gates and U.S. Department of Energy secretary Steven Chu on how to do that. They agreed on many things, including the need for a forward-looking carbon tax decades from now (although Chu noted he doesn’t like to use the “T-word”).

The gentlemen disagreed, too, on how to secure a future when the regulatory industry that oversees the power sector moves so slowly. “It’s hard to plan ahead if it takes 10 years to get permitting,” Gates said. Chu noted it was an issue his department is working on.

At the Energy Innovation Summit, all of the keynote speakers were optimistic. Unlike last year, huge military dollars have not been announced to help support ARPA-E projects, although the White House recently committed $30 million to the agency for alternative fuels.

Instead, the young agency noted that it is already seeing advancements, from Sheetak refrigerators being sold in India to the possibility that genetically modified tobacco could be the key to the energy future. “You’d have Big Oil and Big Tobacco come together and save the world,“ said an always upbeat Arun Majumdar, director of ARPA-E. “You just can’t get better than that.”

Of course, if Big Oil and Big Tobacco don’t end up creating the new energy economy, we’re going to need other solutions. Bill Gates has a simple answer that there needs to be a price on carbon, but not today.

He noted that a carbon tax that kicked in decades from now, in the 20- to 50-year timeframe, would make it clear that carbon would matter in the relevant time period for energy companies making huge capital investments, particularly in power plants and transmission.

Chu, in a more political role, hedged in his agreement. “It could be a modest long-term signal that would spur investment,” he said. Chu compared the concept to the new fuel economy standards that call for a 55-MPG requirement for cars in 2025.

Even with a carbon price decades out, utilities would be forced to pick. Gates noted that depending on the price of onshore versus offshore wind in 30 years, the transmission grid could look very different. “How do you have a plan that accommodates everything that could happen with these economics?” he asked.

The conversation unsurprisingly turned to nuclear, where Gates has an interest and a financial stake in TerraPower, which is reimagining nuclear reactor design. “It’s amazing to see -- at least on paper -- what’s possible,” said Gates. “And it’s all possible with supercomputers.”

Chu agreed that the advancement in computers is allowing for incredible simulations that are pushing the envelope on technologies from batteries and engines to nuclear reactors. But any straight comparisons to the IT sector should be avoided, said Gates, noting that computing and software cannot be compared to building entire power plants.

On this topic, Chu was more optimistic, offering the example of how cell phones leapfrogged traditional telephone infrastructure and distributed generation and suggesting that storage could do the same thing in the developing world.

And while ARPA-E is all about the science that is leading to the breakthroughs that could provide distributed storage and clean energy generation at low cost, Gates was tempered in his outlook given the current investment level. “People underestimate the difficulty of getting the breakthroughs” in storage, said Gates. “In my view, energy research is vastly underfunded by a factor of two. It’s crazy how little we’re funding this energy stuff.”

No one mentioned failures, like Beacon Power, which received $2.8 million in grants from ARPA-E but is currently in bankruptcy. Gates, however, reminded us all that the failure rate is high. “This is a very complex set of technologies,” he said. “We need thousands of companies to be trying these [technologies] so that we have 10 to 20 with a magic solution.”

Majumdar, ever the cheerleader for energy innovation, saw the future prospects very differently, even in a financially constrained world. He noted the U.S. spends $1 billion per day importing oil. “If we don’t change the way we use energy we’ll have an environmental catastrophe on our hands,” he said. “That offers the biggest economic opportunity of our lifetime.”

Tags: arpa-e, bill gates, carbon tax, clean technology, energy efficiency, energy innovation summit, steven chu