Energy Innovation: The Proper Definition and Why it’s So Crucial
Innovation is Central to Making Clean Energy Cheap
The United States and the world face an urgent imperative to transform its energy system by developing and deploying low or zero-carbon technologies on a dramatic scale. And while developed regions like the United States and Europe might be willing to change their consumption patterns and businesses to incorporate clean energy (though not significantly), developing nations can’t afford to pay the necessary premium for this access. And they shouldn’t have to, as they try to gain access to energy of any kind. As such, the only way the entire global energy system can transition to clean energy is if its cost is lower and its performance is equal to or greater than cheap fossil fuels like natural gas, coal, and oil.
Unfortunately, today’s clean energy technologies like wind, solar, electric vehicles, smart grids, and energy storage are more expensive and oftentimes performance-limited compared to their fossil competitors. Solar and wind power are intermittent without energy storage and still require significant advances in energy conversion efficiency. Electric vehicles are up to double the cost of comparable gasoline powered cars, and significant infrastructure build-out like smart grids, charging infrastructure, and transmission lines are barriers to rapid deployment as well. (Read More: An Introduction to Fueling Innovation)
Without a doubt today’s clean energy technologies have made dramatic progress and innovations have propelled a doubling of renewable energy in less than 5 years, but much more is needed. Today’s technologies won’t be able to propel the world to deep reductions in global carbon emissions, but improving on today’s technologies and developing new designs can.
Defining Energy Innovation from a Policy Perspective
In my opinion, no one outside of the occasional Luddite is “anti-innovation.” As a result, more often than not, the term “energy innovation” is used as rhetoric to sell policies that have little to do with innovation at all or could actually stifle innovation. It’s become a useful catch-all phrase in the policy space, so properly defining energy innovation is important!
Historically, research and development (R&D) is fundamentally considered the most important part of spurring energy innovation and, as a result, is most often equated with energy innovation policy. But by itself, R&D is not enough. In this column, spurring clean energy innovation means support for the back-end (basic science and R&D) through the front-end (testing, demonstration, commercialization, and smart deployment) of the technology pipeline. And it’s not enough to view these individual stages of innovation within a vacuum: each interact within an innovation ecosystem and ensuring not only proper support for each, but proper linkages, collaboration, and institutional support is critical. This idea of supporting comprehensive energy innovation ecosystems will be a reoccurring theme throughout my articles.
Supporting Energy Innovation through Science Policy
History has shown that public support is a key driver of innovation. Look no further than natural gas fracturing for the most recent example in a long list of publicly supported technologies that stretches back a century. The U.S. energy industry would not be benefitting from cheap and plentiful shale gas without decades of public investments in R&D, testing, demonstration, and deployment policies.
While global climate change adds an economic, moral, and social element to why governments must aggressively act, I focus more on the direct role of government in particular policy levers. While I’ll discuss in more detail the policy levers available to addressing climate change through innovation, there are three broad reasons why government support for energy innovation is critical.
First, like other industries, the energy industry underinvests in early stage research because the potential private returns on research investments are normally much less than social returns. In other words, energy companies fail to capture enough benefit from research and choose not to invest, resulting in a short-sighted energy industry. This problem is exacerbated further by risk-averse energy firms’ unwillingness to commit limited resources to high-risk research with long time horizons, when competitive pressures demand short-term profits. In response, the government fills this void by publicly supporting high-risk research that the private sector is unwilling or incapable of doing itself (through public research institutions, grants, or tax expenditures).
Second, once research progresses in the laboratory, there isn’t a clear link between early-stage development and piloting the technology for the first-time. This gap –called the technology valley of death – often comes down to cost. Developing a pilot-stage, proof-of-concept project is still research, but requires additional funding that private investors and industry are unwilling to provide because of risk and uncertain payoff periods. Potential technologies must show market validity and certainty to investors, but are unable to do so without piloting the technology. It’s a catch-22 that often dooms even the most promising of emerging technologies.
Third, once an emerging technology is demonstrated proof-of-concept, there is often a significant investment gap between piloting and demonstrating the technology at commercial scale. This so-called commercialization valley of death halts development of first-of-its-kind energy technologies that have been demonstrated and tested as prototypes, but still require additional capital to be manufactured. This is particularly the case in the energy industry, as many emerging technologies are often too risky for private firms and investors because developing a first-of-kind production process for a new technology is expensive, but also because competing fossil fuel technologies are ingrained in the industry with a century’s worth of public and private investment and infrastructure.
Policy Framing and Emphasis Matter
Of course, none of this is new in the policy-sense and it doesn’t get at the policy nuance of how you actually support these weaknesses in the energy innovation ecosystem. The policy choices vary from supporting National Labs to R&D tax credits, pilot projects to regional innovation consortia, and everything in between. The policy choices also vary by technology – there is no such thing as a one size fits all energy innovation policy.
What is new is how we frame our energy challenges and its impact on the fundamental design of US climate and energy policy. Today’s dominant policy emphasis among clean energy advocates – carbon pricing, regulations, and direct purchase subsidies – speak more to job creation and pollution regulation than they do technological innovation. While these framing choices may work in niche markets and advocacy groups it largely ignores that our climate and energy challenges are, in fact, technology problems that require science and technology policy.
At best, the wrong framing results in policies not geared for the right goals. There’s no better example of this than Solyndra and loan guarantees – a potentially useful policy investment to support the commercialization valley of death. Yet, instead of being framed as innovation policy, loan guarantees were largely framed as green jobs policy. When the project failed – something that should be expected in the innovation process – a large-scale political war was sparked that weighed down all climate and energy debate.
At worse, the wrong framing results in the wrong policy emphasis. For instance, advocates and policymakers are almost myopically focused on clean energy tax credits and subsidies while early-stage R&D stagnates at funding levels a third of which is necessary to produce a constant wave of next-generation technology ideas to market.
Ultimately, the true definition of energy innovation policy and how it’s framed in the policy debate is important because it’s the only real way the developing and developed world, and not only the US, can switch from fossil fuels to clean energy. It’s a complex problem that requires not only new technologies but a new way of thinking about the policy issues.
2015 EIA Energy Conference
June 15-16, 2015 - Washington, D.C.
Platts North American Crude Oil Summit
February 26-27, 2015 - Houston, TX