AEIC staff release case studies on government role in energy innovation

In the last half century, American companies have developed the technologies and established the businesses that shape the world’s energy systems today. American companies have led in energy innovation in large part because they are supported by our federal government’s commitment to driving innovation. Acting as a catalyst or instigator, the federal government can quicken the cycles of discovery and invention.

 

As the American Energy Innovation Council outlined in its previous reports, Catalyzing Ingenuity and The Business Plan, private sector innovation cannot address our energy challenges on its own. Private markets generally do not exist for certain society-wide interests, such as ensuring long-term economic competitiveness, maintaining energy security, improving public health, or protecting the environment. Moreover, the private sector has tended to systematically under-invest in research and development relative to the societal benefits that could be realized through such investment, since businesses and investors cannot fully capture the value of their innovation. Markets will undoubtedly drive innovation, but they will so more rapidly when government addresses these twin challenges.

Today, AEIC staff release three case studies that illustrate the various ways in which the federal government has played a productive and necessary role in energy technology innovation. Staff research on unconventional gas exploration & production, advanced diesel internal combustion engines, and low-emissivity windows examine the various mechanisms that the federal government uses to complement and enhance private sector energy technology innovation.

Most often, the government plays the role of catalyst–speeding up activity that the private sector might have developed over longer periods of time. This role commonly takes the form of lowering risks of new technology to the private sector, such as through seed grants and cost-sharing of demonstration projects; creating incentives that reward use of new technologies and drive learning-by-doing, such as through tax credits; speeding diffusion of technical knowledge, such as through public-private partnerships and applied research and development; and standardizing information to help markets work better, such as through labeling and certification schemes.

Sometimes, the government plays the role of an instigator–creating new conditions that change the direction of private sector activity. This role commonly takes the form of creating new knowledge that market participants will not or cannot, such as through basic and applied research, and driving demand for private sector technology innovation, such as through direct procurement or performance standards.

In both roles, the government’s efforts are a complement to the private sector, not a substitute for them. An exhaustive history of each technology’s development would demonstrate that the private sector is the primary force translating ideas into products and markets; however, it is beyond our scope to recount these efforts in detail. Furthermore, these cases show that the dividing line between private sector and government efforts often blurs. For example, public-private partnerships generally utilize cost-sharing, generating R&D efforts that neither party on its own would undertake. Similarly, government funding of R&D through national laboratories and universities invests many young scientists and engineers with skills that they subsequently take to the private sector. In some cases, the government has been the biggest or the sole customer of particular energy technologies, resulting in collaborative effort with the private sector vendor.

Additionally, these case studies suggests we change our understanding of how energy technology innovation works.

Traditionally, technological innovation has been conceived of as “following a path,” starting with new knowledge and proceeding linearly through increasingly realized stages of research and development until reaching full realization of an intended end-product. “Basic” and “applied” research and development are generally synonyms for scientific research and technological invention, a convention that often demarcates the responsibilities of governments and markets. Commercialization tends to be presumed and considered as a follow-on process from innovation, rather than part of innovation itself.

These cases demonstrate that the preceding convention is incomplete. Throughout these cases, energy technology innovation does not often follow a linear path. Rather, diverse research and development efforts, often from previously unrelated domains, intersect to produce novel discoveries or inventions. Similarly, while the intended goals of particular innovations are important, the useful ends of those innovations are sometimes unpredictable. Failure to realize intended goals is common, but failures may still be productive, as successful innovations are sometimes difficult to identify until years or decades have elapsed. Moreover, new knowledge does not always precede new technology; the act of invention and learning-by-doing leads to further discoveries and informs scientific research. Commercialization is rarely automatic; economic, informational, and infrastructural barriers are often surmounted with supportive policies.

For these reasons, energy technology innovation should be thought of not simply as a specific intention realized through a particular program, but also as an emergent property of a vibrant R&D ecosystem. A productive and appropriate government role in such a system is not easily demarcated by either “basic” or “applied” work. Rather, the government’s role should be as catalyst and instigator of the cycles of discovery and innovation across diverse energy and technology domains.

The three cases are available on the staff research section of the AEIC website.