Study recommends $10B/year US federal investment in energy RD&D and a substantial price on carbon emissions; leveraging the national labs and encouraging the private sector for a clean energy future
22 November 2011
As a result of a three-year project, researchers at the Harvard Kennedy School are recommending that the US federal government increase its annual investment in Energy Research, Development, Demonstration & Deployment (ERD3) to $10.0 billion, a 92% increase over the FY 2009 appropriations.
This includes about $5 billion annually for seven technology areas considered in detail: four energy supply technology areas (nuclear energy, bio-energy, fossil energy with and without carbon capture and sequestration, and solar photovoltaic (PV) energy); one enabling technology area (utility-scale energy storage); and two key areas of energy efficiency (buildings and vehicles). The remainder of the funding should go to other areas, including Basic Energy Sciences, the report by the team from the Belfer Center for Science and International Affairs suggests.
Our economic modeling suggests that an investment of a few extra billion per year today could develop technologies that could save the economy hundreds of billions of dollars per year by 2050 in scenarios where there are stringent policies limiting how much carbon can be emitted.
Our current modeling suggests that there could be decreasing marginal returns from spending more than the $10 billion per year we recommend, but that conclusion should be regularly reassessed as technologies evolve. These investments should be targeted on a broad portfolio of technologies, to maximize the chances of achieving major breakthroughs. The largest percentage increases we recommend compared to 2009 funding levels are for energy storage, buildings, bioenergy, and solar photovoltaics. Despite current deficits, the United States cannot afford to forego the long-term investments that will improve its competitiveness in this multi-trillion-dollar market and its national security, while reducing both greenhouse gas emissions and other environmental hazards.—Policy Brief
The study—Transforming US Energy Innovation—also found that it is very unlikely that the goal of reducing carbon dioxide emissions by 83% below 2005 levels by 2050 can be met without both the increased ERD3 investments and policies that price carbon emissions. Accordingly, the report recommends that the US government put in place policies that have the effect of creating a substantial price on carbon emissions (either through a cap-and-trade system or through a tax on greenhouse gas emissions) to increase incentives for the private sector to invest in clean energy innovation and to encourage large-scale deployment of clean energy technologies.
In addition, the report suggests that the US government as well as state and local governments should adopt a range of sector-specific policies to overcome market failures that are limiting the deployment of energy efficiency and clean-energy technologies as part of a coordinated energy strategy.
The recommendations come with the release of report on the findings of the ERD3 project, which was funded by a grant from the Doris Duke Charitable Foundation with the goal of producing and promoting a comprehensive set of recommendations to help the US administration accelerate the development and deployment of low-carbon energy technologies.
The project, part of the Energy Technology Innovation Policy (ETIP) research group in the Kennedy School’s Belfer Center for Science and International Affairs, included the first survey ever conducted of the full spectrum of US businesses involved in energy innovation, identifying the key drivers of private-sector investments in energy innovation.
The researchers also surveyed more than 100 experts working with an array of energy technologies to get their recommendations for energy R&D funding and their projections of cost and performance under different R&D scenarios. They then used the experts’ input to conduct extensive economic modeling on the impact of federal R&D investments and other policies (such as a clean energy standard) on economic, environmental, and security goals.
The report is focused in four key areas:
Designing an expanded portfolio of federal investments in energy research, development, demonstration (ERD&D), and complementary policies to catalyze the deployment of novel energy technologies;
Increasing incentives for private-sector innovation and strengthening federal-private energy innovation partnerships;
Improving the management of energy innovation institutions to maximize the results of federal investments; and
Expanding and coordinating international energy innovation cooperation to bring ideas and resources together across the globe to address these global challenges.
Among the specific findings of the report in the area of designing an expanded portfolio of federal investment leading to the recommendations noted above were:
Experts in a broad range of energy technology fields recommend increases of a factor of 3–10 depending on the area in federal research, development, and demonstration investments. Experts in each of the technology areas covered recommended large increases in federal ERD&D investments. The average recommended increases over fiscal year (FY) 2009 appropriations ranged from 186% for solar photovoltaic to 963% for utility-scale storage (where the base for comparison is small and the potential is large).
Experts in most of the technology areas surveyed believe that federal energy innovation investments, at the levels they recommend, would lead to substantial improvements in performance and reductions in cost by 2030.
The surveyed experts recommend a portfolio approach within their technology areas, with investments spread across a range of technologies and a range of technology innovation stages (from basic research to large-scale technology demonstrations).
Experts in all technology areas expected decreasing marginal returns from federal ERD&D investments in terms of both improved technology costs and performance for very large ERD&D funding increases. These are further reflected in decreasing marginal returns for CO2 emissions under no policy, CO2 allowance price reductions under a CO2 cap-and-trade program, and clean energy standard (CES) credit prices under a power sector CES, illustrated by the energy system modeling results.
The technology improvements projected by the surveyed experts from their recommended ERD&D investments would probably lead to significant, but not dramatic, improvements in the cost and feasibility of fueling a growing US economy while meeting targets for reduced greenhouse gas emissions or oil imports.
The optimal level of RD&D for many technology areas is highly contingent on adopted policies, which means that having a balanced portfolio across different technology options is very important.
In the area of increasing incentives for private sector innovation, the report found that:
Private sector investments and approaches are critical to energy innovation in the United States.
Private sector energy innovation activities are more widespread than previously understood.
Costs are more important than other factors in promoting private sector decisions to invest in energy innovation. Lack of market demand and specific innovation process issues are also important barriers.
Private firms are overwhelmingly focused on short-term returns in making their energy innovation investments.
Government, academia, and the national labs play a major role in shaping private sector energy innovation decisions.
Various forms of partnership with the private sector account for a major portion of US Department of Energy (DOE) ERD&D funding and attract substantial private sector investment.
The DOE does not collect sufficient data on the approaches its programs take to working with the private sector, and their successes and failures, to serve as the basis for policy-making and learning. The DOE appears to have no focused strategy shaping its energy innovation partnerships with the private sector.
Recommendations in this area include:
The US federal government should implement policies that create market incentives to develop and deploy new energy technologies, including policies that have the effect of creating a substantial price on carbon emissions, and sector-specific policies to overcome other market failures. These policies should be aggressive enough to create substantial incentives for private-sector innovation.
The US government should provide additional incentives for private- sector investments in energy innovation.
The US government should establish an Energy Innovation Advisory Board (EIAB) with representation from the private sector, academia, the national laboratories, and other key stakeholders, to advise on how best to accelerate private sector energy technology innovation.
The Department of Energy should develop and implement an integrated strategy for its partnerships with the private sector, which should include the data collection and analysis needed for the effort to learn over time.
The US government should establish a mechanism for working with the private sector to financially support and implement large-scale energy technology demonstrations, where such demonstrations are essential to enable private sector adoption of clean energy technologies that have the potential to significantly contribute to reducing CO2 emissions and oil imports.
In the area of managing energy innovation institutions, the report found:
The United States government is supporting a range of energy innovation from basic research to deployment, and has recently established a number of new energy innovation institutions focused on particular technology states, although some gaps remain.
There has been insufficient systematic study of the effectiveness of US energy innovation institutions, and how their effectiveness might be improved.
ARPA-E has won strong reviews for its focus on high-risk, high-payoff energy technology concepts, and it fills an important gap in US energy innovation.
The US national laboratories play a critical role in energy technology innovation and are likely to continue to do so in the future.
Programs funded by the DOE and, in turn, the national laboratories are faced with volatile funding that often impedes research programs’ ability to move forward effectively.
To be effective, energy innovation institutions require a clearly defined mission; strong leadership with proven technical and managerial excellence; an entrepreneurial culture that accepts risk and encourages both competition and collaboration; sufficient flexibility for the leadership to build the right culture and seize opportunities as they arise (including a significant fraction of lab-directed funds); reasonably stable and predictable funding; balance and linkages between basic and applied research; and strong connections to the private sector.
Recommendations in this area include:
The US government should restructure its management of the national laboratories to maximize their innovation potential, based on the principles just described.
The administration and Congress should provide support for a portfolio of energy innovation institutions designed to ensure that all stages of the innovation chain have appropriate support, avoiding technology gaps and finding “valleys of death.” In particular, the administration and Congress should provide sustained support for ARPA-E to pursue the high-risk technologies that could lead to major energy breakthroughs.
The US government should strengthen the connections between its energy innovation institutions and the private sector throughout the innovation chain, but particularly as technologies move toward the development, demonstration, and deployment phases.
In the final area of strengthening energy innovation cooperation with other countries, the findings include:
Energy technology innovation is a global undertaking with a larger number of countries engaging in scientific, private, and public energy innovation activities than ever before. This creates both new competitive threats and new opportunities for cooperation.
Collectively, the investments in energy RD&D by governments and state-owned enterprises in the emerging economies of Brazil, Russia, India, Mexico, China, and South Africa (the BRIMCS countries) are now as large or larger than those of the developed countries in the Organization for Economic Cooperation and Development (OECD). Out of these emerging economies, the bulk of the energy RD&D investment is being made by state-owned enterprises in China.
Global energy technology markets have changed dramatically in the last two decades, with both energy demand and manufacturing capabilities of clean energy technologies expanding rapidly in emerging economies.
The most important forms of international energy technology cooperation are not directed by governments but arise organically from the activities of private firms, academic and research institutions, and individual scientists and engineers. Governments have key roles to play in facilitating and supporting, rather than hindering, these forms of cooperation.
The US government undertakes international cooperation on energy technologies for many different reasons. No single set of criteria can adequately capture all of the different motivations for cooperation on energy technology.
The U.S. government does not appear to have an overall strategy for its international energy technology cooperation efforts; has no systematic approach to coordinate the many different efforts underway; and does not collect or analyze data on the successes and failures of international energy technology cooperation that would make it possible to strengthen these programs over time by learning from experience.
Recommendations in this area include:
The expanding and increasingly diversified global ERD3 landscape im- plies that the United States needs to develop and implement an effective strategy for cooperation with other countries, to pursue global sources for the best ideas and innovation opportunities, while also targeting investments to maintain its competitive position and future market share.
The US government should expand funding for international energy technology cooperation in three ways: (a) by setting aside a portion of the budgets of each major energy RD&D program for international cooperation to finance efforts identified bottom-up by program officers or project managers involved in international energy RD&D efforts; (b) by providing incubator funding to support the procedural aspects for creating technology-focused cooperation projects; and (c) by providing funding for programs that represent strategic priorities identified top-down by a new interagency committee.
The US government should establish an interagency working group under the National Science and Technology Council (NSTC) to coordinate international energy technology cooperation.
The US government should establish a focused effort to collect and analyze data on its international energy RD&D cooperation activities, creating an information platform at the Energy Information Administration (EIA).
The ETIP project is part of the Science, Technology, and Public Policy Program and Environment and Natural Resources Program at the Kennedy School. Professor Venkatesh Narayanamurti and Associate Professor Matthew Bunn were the principal investigators for this work, and the research team was led by Dr. Laura Diaz Anadon, ETIP director. The project was supported by a generous grant from the Doris Duke Charitable Foundation.
Anadon, Laura Diaz, Matthew Bunn, Gabriel Chan, Melissa Chan, Charles Jones, Ruud Kempner, Audrey Lee, Nathaniel Logar, and Venkatesh Narayanamurti, Transforming US Energy Innovation, a report of the findings of the Energy Technology Innovation Policy (ETIP) research group, Belfer Center for Science and International Affairs, Harvard Kennedy School, November 2011.
Transforming US Energy Innovation (executive summary)
Transforming US Energy Innovation (policy brief)
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