How innovation reduces the price of new technology
The main purpose of RD&D investment is to make new technologies affordable. That means it is necessary to understand what drives down the price of new technology.
Getting this right is the key to designing good programs.
The United States has a history of great success in driving down the price of new technology. Indeed, this is the basis of its prosperity. Computer chips are the most famous example. Their costs have come down by a factor of more than four million since 1975.2 For perspective, if today’s chips were the same size and cost as they were in 1975, Apple’s iPod would cost $1 billion and be the size of a building.
Other technologies, from cars to consumer goods to energy, follow the same kind of price reduction. Solar photovoltaic cells, for example, have dropped by about 22 percent in cost with each doubling of capacity. This is known as the “learning curve” for solar. But falling prices are not an axiomatic result of time passing, or even of more installed solar arrays. The drivers of this progress are worth unpacking.
There are three basic phases of technology development: science, engineering, and commercialization. Employing best practices in each of these realms is the key to bringing down costs—and thus these best practices drive the recommendations in this report.
The role of basic science
The first stage of technology innovation comprises research and development in the basic sciences. For example, gridscale energy storage would make renewable power far more useful, but making electricity storage affordable will require fundamental advances in electrochemistry. Indeed, many of the most urgently needed innovations still depend on fundamental advances in biology, chemistry, materials science or thermodynamics. Today’s basic science research will provide the foundation for tomorrow’s energy technologies; we need to commit to these investments.
Several principles differentiate the successful science programs from the unsuccessful. The National Academies, Government Accountability Office, and President’s Committee of Advisors on Science and Technology have undertaken numerous assessments of national energy RD&D programs.4
The lessons stressed by these studies:
- Overall research goals and desired social benefits should be explicit.
- Peer review should be built into research selection and evaluation.
- Programs should tolerate failure, because it is not research if the outcomes are known in advance.
- Funds should be concentrated in centers of excellence rather than spread across many institutions.
- Funding risk should be minimized through periodic check-ins, or “performance gates,” in which well-defined milestones must be met or the project gets shut down.
Sometimes moving from science to engineering requires large sums of money, while other times the needs are small. At Lawrence Berkeley National Laboratory, scientists have made important steps for advanced lithium-ion (Li-ion) batteries – but they are caught in a budget trap. Researchers at the lab found that if silicon were used instead of graphite in batteries, total battery life would be expanded significantly—for example, more than doubling the number of recharge cycles for electric vehicle batteries. But silicon use requires creation of an expensive new manufacturing production line. Gao Liu, a staff scientist at Berkeley Lab, found an alternative: He has test results showing a new silicon method that uses the same manufacturing production lines as graphite Li-ion batteries. He needs minimal engineering assistance to carry out the next round of complex tests to see if this production will work. But national laboratories have a heavy focus on basic scientific research rather than applied research, and Gao Liu’s scientific research has already been successfully published. So for now, at least, this promising energy technology remains an idea rather than a reality.
Engineering: From the lab to the shop floor
Engineering turns research into practice by converting science into workable products. For example, a cup of algal biofuel turns into a running system for oil production at scale, or a solar cell prototype transforms into a workable module that can be mass produced. The engineering phase must be informed by what is required to take a new technology to industrial scale, make it easy to manufacture, and integrate into existing systems. The engineering phase also solves problems associated with constructing large, first-of-a-kind pilot projects.
Best practices in engineering include:
- Ensure that the ultimate goal is within the realm of the possible, in terms of cost, performance and reliability. Set clear performance gates for technologies in the engineering stage.
- Bring many disciplines together to tackle system-wide energy engineering questions.
- Dispatch engineers and production experts to complement the scientists who already focus on R&D.
- Enable large-scale pilot projects. Focus on whether a project is replicable: learning how to engineer and build the first energy project should be about learning how to build the next ten projects.
Commercialization: Closing the sale
For innovations to be commercialized, private sector manufacturers must anticipate large-scale, long-term markets. For example, renewable portfolio standards created the large market that was required to drive the cost of wind power from 40 cents per kilowatt-hour to 8 cents.
That investment yielded a clean source of power that is increasingly competitive with traditional electricity prices. The standard did double duty: It bought a lot of wind power, and by helping drive down the cost of wind, it created a viable new energy technology option.
Best practices in commercialization include:
- Clear, long-term market signals to create market pull for innovation. Examples include renewable performance standards, feed-in tariffs, and reverse auctions. Such policies must reward performance, not investment.
- Projects should include private sector participants with “skin in the game.” The power of competitive markets is crucial to real-world discipline that avoids waste.
- Projects at the commercialization stage should also have performance gates. Such clear markers are central to private sector innovation, and they will help in the public sector as well.
Regardless of the specific mechanism, all policy options for supporting the commercialization phase must share one characteristic: They must operate over timeframes long enough to send appropriate signals to the private sector.