Tuesday, 13 September 2011

the U.S. energy innovation program - Catalyzine Ingenuity Report: Executive Summary


Innovation is the core of America’s economic strength and future prosperity. New ideas and technological advances fundamentally shape our quality of life. They are the key to fostering sustained economic growth, creating jobs in new industries, and continuing America’s global leadership.

Throughout the history of the United States, the federal government has played a central role in catalyzing and driving innovation and technology development in a variety of strategic areas — defense, health, agriculture, and information technology, to name a few — and it has often done so with strong results.

However, of all the sectors in the economy where innovation has a critical role to play, the energy sector stands out. Ready access to reliable, affordable forms of energy is not only vital for the functioning of the larger economy, it is vital to people’s everyday lives. It also significantly impacts the country’s national security, environmental well-being and economic competitiveness.

Unfortunately, the country has yet to embark on a clean energy innovation program commensurate with the scale of the national priorities that are at stake. In fact, rather than improve the country’s energy innovation program and invest in strategic national interests, the current political environment is creating strong pressure to pull back from such efforts.

Increasingly, three principal arguments are being made against an increased federal role in energy innovation:

~ Energy innovation should be the responsibility of the private sector.

~ If there is a role for government in energy innovation, our current federal government is not equipped to invest taxpayer dollars wisely and in a way that is likely to yield real results.

~ Even if there is a government role and government programs are organized and empowered to achieve success, there isn’t any money to fund these activities in this fiscal climate.

Based on history and on our own experiences leading innovative companies, we don’t subscribe to any of these arguments.

1.  Why does government need to play a role in supporting energy innovation?

• Although we agree that the private sector is and will continue to be an important source of innovation, we believe the federal government has an integral role to play in advancing energy innovation.

• The U.S. government has a long and successful history of supporting publicly-funded research and development (R&D) projects that foster the development of new technologies.

• History shows that support for innovations that serve a fundamental national interest cannot be left to the private sector alone for two primary reasons:

- Private markets generally do not exist for certain benefits, such as providing for a strong military, improving public health, and protecting the environment.

- The private sector has tended to systematically under-invest in R&D relative to the potential gains to society -  even where a market for the desired technology exists - because it is difficult for any individual firm to monetize all the benefits of these types of investments.

• The energy sector in particular has suffered from under-investment in research, development and demonstration (RD&D), for three main reasons:

- Energy is not valued in and of itself, but rather for the goods and services it provides. This means that product differentiation does not drive innovation in energy supply options in the same way that it would for other types of products and services.

- Many energy technologies are capital-intensive and long-lived, with the result that many require significant up-front cash with a slow return. Slow turnover of capital assets combined with the need for large up-front investments mean that the sector as a whole is subject to a high degree of inertia, a tendency to avoid risk, and domination by incumbent firms.

- Energy markets are not perfectly competitive, due to regulatory uncertainty, market fragmentation, and distortions introduced by past policies-all of which generally slow the adoption of innovative technology.

• Government-funded R&D programs in a number of areas - such as defense, health, agriculture, and information technology (IT) - have enabled the United States to lead not just in specific technologies but in entire industries. Unfortunately, federal efforts thus far in support of clean energy R&D have been inadequate to the task and paltry in comparison with other sectors.

• We strongly recommend increased government support and leadership to develop and demonstrate new energy technologies to meet this century's challenges.

2. How should the government play a constructive role in energy innovation?

• To enhance U.S. leadership in clean energy technologies, the federal government must not only maintain a robust effort across the innovation continuum, but it must also promote an environment that favors innovation throughout the energy economy.

• The United States is fortunate to have a number of strong assets - celebrated national labs and universities, world-class entrepreneurs, a sophisticated financial industry, a legal system that protects the sanctity of contracts, and large technology and energy companies with the skills to scale technologies - ready to contribute to energy innovation. But the country lacks a defined sense of national purpose around this issue and a strategy for building innovative energy systems.

• Looking at past examples of government innovation and drawing from our own private-sector experience, we believe three principles should guide the U.S. government's innovation programs:

- Focus on specific market failures in areas that can make a significant impact on strategic priorities.

- Catalyze private-sector competition by providing incentives aligned with strategic outcomes.

- Use the most cost-efficient actions to facilitate positive outcomes.

• Drawing on these three principles and building on our previous report, we recommend five concrete actions to improve the effectiveness of the U.S. energy innovation program:

A. Develop and implement a comprehensive, government-wide Quadrennial Energy Review (QER) that seeks to align the capacities of the public and private sectors. The QER should pinpoint key market failures and technology chokepoints in order to better orient federal programs and resources.

B. Support "innovation hubs" that concentrate resources and knowledge and thereby accelerate the development of new technologies. We strongly support the direction of U.S. Department of Energy (DOE) Innovation Hubs, Bioenergy Research Centers and Energy Frontier Research Centers and believe they should receive full funding.

C. Support and expand the new Advance Research Projects Agency-Energy (ARPA-E). As we have noted previously, ARPA-E challenges and empowers innovators across a range of technology pathways. By nearly all accounts, it appears that ARPA-E is being managed as a highly efficient, risk-taking, results-oriented organization. At a minimum, ARPA-E should receive at least $300 million per year. Going forward, investments in ARPA-E should be prioritized and increased.

D. Make DOE work smarter along the ARPA-E model. DOE has a critical role to play but needs to evolve beyond its current program structure and culture to be maximally effective. We argue for "ARPA-izing" a larger portion of DOE and the national labs by expanding some of the new authorities, tools and processes that are embodied in ARPA-E to other parts of the agency.

E. Develop a first-of-a-kind technology commercialization engine along the lines of the proposed Clean Energy Development Administration (CEDA). Previously, we called for a new government-backed institution dedicated to overcoming financing hurdles for new advanced, commercial-scale energy technologies. We believe the CEDA legislation aligns with our original recommendation and would mobilize significant private-sector capital to bridge the transition from demonstration to commercialization.

3. How Can the U.S. Government Pay for Energy Innovation in a New Era of Fiscal Austerity?

Paste your document • There is no way to make the progress this country requires without increasing federal support for energy innovation across the entire innovation continuum. Even in these challenging fiscal times, we believe that underfunding energy innovation would be a grave mistake. Supporting innovation is an investment, not a cost.

• We previously called for a three-fold increase in annual energy innovation investments and maintain that such a level should be our country's target over the next decade. At the same time, the AEIC fully understands the gravity of the nation's current fiscal situation.

• As a result, we see an urgent need for a new energy innovation funding regime that accounts for current budgetary realities, but still ensures that our nation makes targeted, smart, basic investments in its energy future. We must develop a funding regime that is dedicated, consistent, and not beholden to annual appropriations. In general, federal funds for energy innovation should originate from revenues from the energy sector itself rather than from general revenues.

• We have identified a number of options that could provide funding for energy innovation investments that are commensurate with our original recommendations. These options include:

- Diverting a portion of royalties from domestic energy production;

- Reforming and redirecting energy industry subsidies;

- Collecting a charge on sales of electricity;

- Levying fees on other energy or pollution sources; and

- Streamlining DOE.

AEIC does not advocate for one revenue option over another; the only unacceptable option is to fail to make these investments. The resources to support increased innovation investments are available. Wise investments in a new generation of energy technologies are not only justified, but vital to our future. We urge our political leaders to direct them appropriately.

The Payoff

We know the federal government has a vital role to play in energy innovation. We know the federal energy innovation system can be structured effectively to achieve real results. And we know there are several ways to pay for public investments in this domain.

If the U.S. fails to invent new technologies and create new markets and new jobs that will drive the transformation and revitalization of the $5 trillion global energy industry, we will have lost an opportunity to lead in what is arguably the largest and most pervasive technology sector in the world. However, if the U.S. successfully innovates in clean energy, our country stands to reap enormous benefits.

It is time to put aside partisan interests and embark, as a nation, on a path to achieving our clean energy goals.