Clean energy innovation and deployment policies work best in concert

Recently, the Information Technology and Innovation Foundation’s (ITIF) released its report, “Challenging the Clean Energy Deployment Consensus.” Provocative in tone, the report argues that a transition to a low-carbon energy system requires the development of new energy technologies that are much less expensive than the existing suite of clean energy technologies. The report concludes with several recommendations, including a recommendation to increase public investment in energy R&D to $15 billion annually—a target proposed by the American Energy Innovation Council in 2010 and referenced in Secretary of Energy Moniz’s Senate confirmation testimony earlier in 2013.

ITIF’s report emphasizes that the key to mitigating climate change is to make clean energy cheap enough to replace conventional energy without subsidies. This is important both for the United States to reduce its current emissions and for the world to avoid massive future emissions. Climate change is a global phenomenon, and energy consumption in developing countries will grow significantly as populations become more affluent. Unless clean energy is cheap enough to be deployed everywhere, this future demand is likely to be met in large part by fossil fuel energy sources.

ITIF suggests that, while deployment has driven clean energy costs down incrementally, only new technology breakthroughs will result in a level-change in the cost of clean energy, driving it low enough to displace conventional energy worldwide. In line with this, ITIF suggests that too much public investment goes toward clean energy deployment and not enough toward clean energy R&D, arguing that regulation and incentives on their own will not induce innovation in a significant manner or fast enough.

In our view, the first argument over-generalizes actual development pathways that various energy technologies have travelled. Technology breakthroughs do occur and make sudden changes in energy costs possible, but they are not the whole story. For example, as we reported in our R&D Case studies, while the development of jet engines was a real technology breakthrough, incremental improvements of the technology over decades enabled their unforeseen adaptation to electric power generation – and is part of the reason why gas-fired power is now so cheap. The other reason gas-fired power is cheap is because of the economical production of shale gas – a story of many incremental improvements in horizontal drilling and hydraulic fracturing that eventually led to a technology breakthrough. Similarly, breakthroughs in LED lighting were on their own not enough; years of incremental improvements in LED chip fabrication, light quality, and integration into lamps were just as critical for moving technologies to successful commercialization. While public investment in technology breakthroughs is critical for a clean energy future, public investment in the less glamorous incremental improvements to clean energy technology are similarly important.

The second argument discounts the contribution of deployment incentives. The costs of clean energy are comprised of three general categories: technology costs, non-technology business costs (often termed “soft costs”) and financing costs. Deployment incentives have stimulated new demand for clean energy, spurring manufacturers to ramp up production and attain economies of scale to meet this demand. These economies of scale are responsible for significant decreases in technology costs. Similarly, the increase in deployment activities has enabled businesses to gain new knowledge from their experiences and apply them to their operations. This “learning-by-doing” has enabled clean energy businesses to lower costs from installation, customer acquisition and other operations—efficiencies in cost that are transferable to new technologies as well. The learning-by-doing also applies to investors; increased clean energy deployment has generated track records of performance and forged deal structures that have unlocked new investment and reduced costs of capital for clean energy. While R&D can drive down technology costs, it is unclear what impact it can have on non-technology business costs and financing costs.

The lesson is not that we need invest in innovation OR deployment, but that innovation policies and deployment policies are most effective when they are designed and implemented in concert, strengthening the entire energy innovation ecosystem as a whole.