What Is Federal Energy Innovation Policy?
Innovation is the process by which fundamental scientific discovery is applied to a specific technological context, followed by the invention of a product which is then prototyped, scaled and ultimately commercialized (RDD&D). Myriad parties contribute their unique strengths and expertise to innovation, including governments, universities, and the private sector. Innovation is marked by various stages of technology development, including:
- Research – includes both basic and applied research and encompasses both fundamental scientific research (e.g., physics or chemistry) and the translation of those findings into specific technological contexts or applications (e.g., identifying new potential battery chemistries).
- Development – is the stage where an idea for a product is adapted into a prototype and tested.
- Demonstration – is the stage where a technology is tested at a scale significant enough to validate the integration of systems, including technical and economic viability.
- Deployment – is the stage where a technology has reached commercial viability and has begun to be broadly diffused.
Innovation policy is a key government role in this process. Because the energy technologies in particular are capital and regulatory intensive and can take years, if not decades, to commercialize, the private sector will generally underinvest in research. Thus, the full economic benefits of scientific discovery are deferred or delayed relative to the near-term public benefits those investments could produce. This is true for low-carbon technologies, for which the unpriced externality of greenhouse gas pollution also drives underinvestment relative to net social benefit. This is why it is critical that the government support RD&D, particularly in innovative low-carbon technologies. In the journey from scientific discovery to commercial product, promising technologies can get stuck in the “valley of death” where they face a multitude of technical, regulatory, policy and market risks that can make it extremely difficult to attract the capital necessary to commercialize the technology.
Though business expenditures on basic research have increased significantly since 2012, the private sector plays a much stronger role in latter stages of the innovation cycle, and is the primary funder of applied research and development in the U.S. Still, many new technologies face barriers to entry into existing markets due to financial, policy, and regulatory barriers that often favor incumbent technologies, necessitating a range of policy incentives to enable deployment.
How Does Federal Energy Innovation Policy Work?
New innovations that reach full market diffusion with policy support do so through a combination of supply “push” policies such as RD&D investments and demand “pull” policies such as procurement and tax incentives that enable the private sector to commercialize useful products that can access and thrive in markets. The federal government has been a predominant driver of RD&D investments, especially for clean energy technologies. These technologies will be critical to reducing greenhouse gas emissions given both the significant emissions profile of the energy sector and significant growth projections for global energy demand. The U.S. Department of Energy (DOE), particularly through its oversight of the national laboratories, has played a key role in advancing these technologies, through RD&D as well as collaboration with the private sector to foster commercialization efforts. Other agencies also fund mission-relevant RD&D with significant potential emissions reduction benefits. For example, the U.S. Department of Agriculture is advancing research on agricultural and forestry practices that can increase natural carbon storage.
Our ability to reduce emissions and avoid the worst impacts of climate change will depend on our ability to develop and deploy – at scale – advanced, low-carbon technologies that provide equivalent or better energy services at costs competitive with incumbent technologies. This will require accelerating the innovation cycle, along with close and effective collaboration with the private sector to commercialize these technologies. A number of new innovation models have emerged in recent years to foster improved collaboration with the private sector, such as DOE’s multidisciplinary Energy Innovation Hubs, which promote public and private collaboration on research and engineering to tackle important energy challenges.
Key Technology Innovation Policy Design Considerations
The success or failure of technological innovation is driven by a range of technical, financial, market and policy circumstances. Importantly, the policies that drive innovation can vary by sector, along with market and technological conditions. Mechanisms to drive deployment are addressed elsewhere in this catalogue, but key policy considerations for federal support in earlier stages of the innovation cycle include:
Key Design Considerations
Is emissions reduction an explicit objective in a given agency or program authorizing legislation and/or mission? What does legislation authorizing specific agencies or programs provide in terms of funding levels and direction? Are programs being funded at their fully authorized levels through appropriations?
Which stages of the technology development cycle are federal programs supporting? Are these programs targeted toward filling gaps the private sector is not well-positioned to fill, e.g., the “valley of death”?
Are federal investments sufficiently focused on reducing risk for projects advancing technologies that may attract some private sector investment, but which have public benefits that warrant public investment as well? Are those investments leveraging or “crowding in” the private sector, or supporting projects the private sector would have anyway, effectively “crowding out” private investment?
Most programs at the Department of Energy by law must require that recipients of federal funding cover a portion of project or program costs, referred to as “cost-share”, although nonprofits and institutions of higher education are exempted. Is the cost-share appropriate for the level of risk in a project? Is the statutorily set 50 percent cost-share for demonstration projects appropriate, or should Congress – in authorizing programs – instruct the Secretary of Energy to more frequently exercise its legally authorized discretion to reduce cost-share requirements for technology demonstrations that meet specified criteria?
The U.S. has long been a global leader in innovation, particularly in energy – having developed nuclear fission, solar photovoltaics (PV), the lithium-ion battery and oil and gas extraction technologies that enabled the shale revolution. These and other innovations originating from the U.S. ecosystem of national laboratories, academic institutions and the private sector served as a foundation for the economic ascendance of the United States in the twentieth century. In recent decades, DOE’s RD&D programs have advanced a host of technologies including renewables, carbon capture, and vehicle technologies and fuels that have provided significant economic returns to U.S. taxpayers, while reducing greenhouse gas emissions and enhancing American competitiveness internationally. A new agency – the Advanced Research Projects Agency for Energy or ARPA-E – was launched in 2009 and utilizes a more entrepreneurial approach to help accelerate early-stage technologies toward commercialization. ARPA-E has already led to the creation of 82 new companies, more than $3.2 billion in follow-on private funding, and nearly 400 patents. However, the U.S. once directed a far greater percentage of federal spending to energy innovation than it does now, as federal energy R&D outlays have decreased by roughly two-thirds over the last thirty years as a percentage of total R&D outlays.
- Robert M. Solow. “Technical Change and the Aggregate Production Function.” The Review of Economics and Statistics 39, no. 3 (1957): 312-320. Available at: https://faculty.georgetown.edu/mh5/class/econ489/Solow-Growth-Accounting.pdf
- National Academies of Sciences, Engineering and Medicine. The Power of Change: Innovation for Development and Deployment of Increasingly Clean Electric Power Technologies (Washington, DC: The National Academies Press, 2016). Doi: 10.17226/21712
- Vannevar Bush, Science, The Endless Frontier – https://www.nsf.gov/od/lpa/nsf50/vbush1945.htm
- Pasteur’s Quadrant, by Donald Stokes – https://www.brookings.edu/book/pasteurs-quadrant/
- Brad Townsend and Erin Smith. “U.S. Energy R&D Architecture: Discreet Roles of Major Innovation Institutions.” American Energy Innovation Council and Bipartisan Policy Center. March 2016. Available at: http://americanenergyinnovation.org/2016/03/u-s-energy-rd-architecture-discreet-roles-of-major-innovation-institutions/
- Pathways to Decarbonization: Accelerating Clean Energy Technology Innovation https://bipartisanpolicy.org/wp-content/uploads/2020/04/BPC_Energy-Decarbonization-Innovation_R01.pdf
- CRS, U.S. Research and Development Funding and Performance: Fact Sheet https://fas.org/sgp/crs/misc/R44307.pdf
- What’s So Special About ARPA-E? https://bipartisanpolicy.org/blog/whats-so-special-about-arpa-e/
- The Power of Innovation, AEIC http://americanenergyinnovation.org/wp-content/uploads/2017/06/AEIC-The-Power-of-Innovation-Inventing-the-Future.pdf
- Across the “Second Valley of Death”: Designing Successful Energy Demonstration Projects https://itif.org/publications/2017/07/26/across-%22second-valley-death%22-designing-successful-energy-demonstration
- ARPA-E Impact https://arpa-e.energy.gov/?q=site-page/arpa-e-impact