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Has Government Spending on Energy Research Been a Waste?

by Michael Levi
November 14, 2011

Steve Mufson had a piece in the Washington Post Outlook section this past weekend suggesting that the $172 billion that the U.S. government has spent on early stage energy research since 1961 has largely been a waste. (I say “suggesting” rather than “arguing” because Steve doesn’t quite make the point explicitly; that said, it’s hard to read his essay without being nudged toward that conclusion.) There’s a lot of smart stuff in the piece, but in the end, it’s unconvincing.

The basic reason is simple: it doesn’t take much for $172 billion of spending on energy innovation to pay off. U.S. consumers spent roughly $30 trillion on primary fuels and electricity infrastructure between 1970 and 2009. (Data from here; I’ve adjusted everything to 2005 dollars.) That doesn’t include all the money spent on energy consuming technologies like automobiles and air conditioners. Even ignoring that, though, one can loosely conclude that if government spending lowered either energy prices or consumption by a mere 0.5 percent, it was worthwhile. (I say loosely because lower prices or consumption aren’t pure savings; part of them would be a decreased resource transfer within the United States. That said, the same is true of treating government spending as a pure cost.) If I had the data to include spending on cars, trucks, and other energy-using technologies, that threshold would be even lower. (Spending on cars, for example, is currently similar to spending on the gasoline they use.) It’s not hard to imagine ways that government spending could have paid off at least this much, whether through technologies that made cars more efficient, natural gas extraction more feasible, or nuclear power safer for a given cost. Indeed government would need to be spectacularly ineffective to not have generated a positive return on its investment.

The same argument can’t be made for private venture capitalists. Energy VCs can fail for two basic reasons: they can pursue technologies that are destined to be turkeys, or they can pursue good technologies but still fail to capitalize on them (e.g. by losing the relevant market to a competitor). Governments have a massive edge here: it’s a lot harder for them to fail in the second way. (Yes, manufacturing can migrate to other countries, but U.S. consumers still benefit from lower prices.) That’s a big part of why, despite a record marked with failures of the first kind, government investment in energy research is generally pretty wise.

Post a Comment 5 Comments

  • Posted by Lee Black

    It would be interesting to include public health costs in determining the costs of fossil fuel vs renewable energy and the benefit of government investment.

  • Posted by Charles A. Gardner

    $172 billion for early stage energy research over the past 50 years? That’s $3.4 billion per year, just 1/10th of the $30 billion per year that the Federal government now spends on health research. Are these our priorities for investing in the future? Further, from 1978 to 2008 Federal spending on renewable energy R&D was only 16% of total energy R&D. Of the remainder, 15% went to energy efficiency R&D, 25% to fossil fuels R&D, and 41% to nuclear energy R&D. Are these the right priorities for investing in our energy future?

  • Posted by David B. Benson

    Yes, some of the money was ‘wasted’ in the sense that the projects never made it to commercialization; ask VCs about that aspect. But looking more largely one can surely make the case that a dollar spent on energy reasearch has brought more return than a dollar spent by NIH (for example).

    All told, despite defects, a fairly decent rate of return on investment.

  • Posted by Mr. Richards

    I agree to Daid Benson, sooner or kater we consumers will be reaping what the government had spent on energy research. but for now, i think the best solution to save money is to go for Business
    Electricity
    provider that offers competitive price rates and surely meets our demands.

  • Posted by Tama Copeman

    The benefits from government investment in energy research broadly include reduction in energy price and consumption, and higher levels of security, quality, reliability, and safety. As an example, the vision for a smart grid is to enable real-time information and the near-instantaneous balance of supply (capacity) and demand at the device level. It would accommodate all generation and storage options, allow for direct participation by consumers, enable new products and services, optimize assets, operate efficiently, react to disturbances, and be resilient to attacks and disasters. These benefits ultimately should integrate into cost reductions for lower utility prices. In an EPRI technical report March 2011, it was estimated the investment needed to establish a smart electrical power delivery system is between $338 and $476 billion, and the total value estimate range of between $1,294 and $2,028 billion; resulting in an estimated benefit-to-cost ratio range of 2.8 to 6.0. There are issues. It remains to be seen how far the implementation would penetrate into the public consumer market, however, any improvements to the grid’s security and reliability alone would be worthwhile.

    As there are no silver bullets in energy production, storage, distribution, and consumption, the DOE has taken a prudent approach with a multiyear portfolio of programs. For example, the FY 2012 Clean, Renewable Energy Generation budget request of $1,164.9 million consists of a variety of renewable programs including solar ($457.0 million), wind ($126.9 million), water ($38.5 million), hydrogen ($100.5 million), biomass ($340.5 million), and geothermal ($101.5 million). The program budgets are adjusted over the years as technologies either advance through commercialization or not. One can always (and justifiably) debate the budget levels in the various programs, but the overall approach is sound.

    Commercialization of technologies inherently involve risk. On the path from the laboratory to products in the marketplace, technologies must evolve from working in idealized systems to messy real-world applications including dynamic behavior, mal-distribution at large capacities, material performance, etc. New energy technologies must compete with traditional technologies, which have been operating and improved incrementally over many years. Many new energy technologies ultimately fail to deliver cost-competitve solutions. Biological systems are vastly more complex and can fail on performance after years of clinical trials “scaling up” from animal to human. Failures should be expected in any technology commercialization, along with learnings derived from the experience. I agree that government investment in energy research is generally pretty wise.

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