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Diagnosing the Energy Innovation Gap

by Michael Levi
June 17, 2010

Now that George Clooney and Angelina Jolie are CFR members, who might be next? I don’t have any idea, but I hope that, having mentioned them, this blog’s Google ranking will go up. One thing I do know, though, is that the new report from the American Energy Innovation Council is well worth reading.

The report makes a strong case for direct government support of energy technology research, development, and demonstration (RD&D), as part of a three-element effort that also includes policies that create demand for clean energy technologies, as well as efforts to expand and improve math, science, and engineering education. I liked the recommendations, but even more, I liked the diagnosis, which is probably the clearest I’ve seen.

Here’s the argument:

“The private sector has underinvested in energy innovation, and it cannot achieve these goals alone. There are fundamental differences between energy and most other economic sectors, and these differences limit the ability of the private sector to solve large-scale energy problems on its own.

“First, the high price of inaction highlights the need for the public to invest in better energy options. National security, national economic strength, and the environment are not primary drivers for private sector investments, but they are critical for the health of our country. They merit a public commitment.”

This, of course, is not in itself an argument for government RD&D support; it’s an argument for pricing externalities. But let’s continue:

“Second, large-scale deployment of many new energy technologies requires massive capital expenditures that are too risky for private investors. A new generation of microwave technology might cost $10 million to develop and can be built on existing assembly lines. That risk-reward calculus makes business sense. In contrast, a new electric power source can cost several billion dollars to develop, yet still will carry risk of technology failure or regulatory changes. And the product, electricity, is sold into a generic market that does not differentiate between clean and dirty sources. So that investment does not make sense for most companies.”

The last bit, once again, can be dealt with through a pricing system. But the rest of the bullet gets right to the heart of the problem.

“Third, America’s long-term corporate R&D budgets, especially those run by utilities, have been in decline for several decades. Fourth, the turnover in the electrical generation system is very slow. Power plants last 50 years or more and are relatively cheap to run once built, so there is little market for new models.Moreover, patents for replacement technology last only 20 years, so the slow power plant turnover considerably reduces the reward for inventors.”

This is extraordinarily important. The case being made here is that innovation in energy technology is slow – period. This is not a problem that’s specific to clean energy – it’s a problem for all energy. Policies that simply level the playing field for clean energy won’t fix that. Something considerably broader – including direct support for RD&D – seems to be required.

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  • Posted by David C-T

    Michael,

    The American Energy Innovation Council report is very interesting indeed – I believe Jeff Immelt and Bill Gates had a chance to present these arguments in person to President Obama last week, which is good news.

    But perhaps you could help us clarify what this report specifically has in mind for energy R&D. The report recommends that the U.S. should invest $16 billion per year in clean energy innovation, but the authors are always careful to avoid stating who exactly should be investing this money. Is it the federal government? The energy industry? The U.S. in general?

    It would also be great to hear your thoughts on what form direct support for R&D should ideally take in order to be most effective.

    [ML: The money is USG funds -- see, for example, the detailed (though notional) breakdown in the technical appendix. Private money, which they'd aim to attract through PPPs, would be on top of that.]

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