June 21, 2010
Exploring the Old Frontier: How to Transform the Energy Sector
David Mitchell, Breakthrough Fellow
The American culture has been one of innovation, pushing against old barriers and opening up new territories. In many ways, we have been shaped by the frontier. The problem with Energy is that it is an old frontier: an "eastern territory" that we captured with great success through the discovery of fossil fuels. As such, the Energy challenge demands that we move against our instincts, from "West to East". For this to occur, we need both a pricing strategy and a technology strategy at the federal level.
In "Taking Covered Wagons East", Weiss & Bonvillian explain this challenge neatly: we must "go back over the mountains", they say "to bring innovation into the already occupied territory of established complex technology sectors". This is something we clearly do not find easy. To do this successfully will therefore require massive public investments in energy R&D of the order of $30 billion per year, to encourage breakthrough technologies.
The Energy sector is an "occupied territory", making transformation difficult. Many have framed the challenge as being similar to landing on the Moon, but this is different to the "Moonshot" in one crucial aspect: no one had ever been to the Moon before, but we have been providing cheap, reliable energy for decades. As Nate Lewis is fond of saying, "this is like trying to get us to the moon when a bunch of airlines are already fly there and handing out peanuts en route!"
In other words, the establish energy sector is fiercely resistant to the change it so badly needs.
The low cost of fossil fuels makes entry into the market by renewables difficult. Technologies are locked-in, and lobbies for the status quo are nigh impossible to unseat and disrupt. As Weiss & Bonvillian explain, the energy sector today is a "complex sector" which has its own infrastructure and which is supported by established technologies. The playing field is, quite simple, non-level, and new entrants are up against an established Techno-Economic-Political Paradigm. This particular paradigm is proving hard to shift.
To bring about energy innovation, we therefore need to encourage bringing breakthrough energy technologies into occupied territories, rather than, as we have done so successfully in the past, into new territories. For this to occur, our spending on re-entering the "old frontier" has to increase dramatically. To enter these "old territories", new entrants must be price competitive immediately upon market introduction, even against legacy competitors that don't pay their full environmental or geopolitical costs.
Yet at present, spending on breakthrough technologies and R&D is frighteningly low.
U.S. federal spending on R&D for new energy technology is about half of what it was in 1980. Energy spending declined from 10% of all U.S. R&D in 1980 to just 2% in 2005. For the sake of comparison, while we in the U.S. spend some $30 billion per year on health care R&D, we spend less than $5 billion per year on energy R&D. That kind of low spending will not bring the necessary transformations we need in the Energy Technology Sector. In turn, private sector spending on health care R&D sits around $60 Billion per year, compared to just $3 Billion spent by the private sector per year on energy R&D. This, too, has to change.
That being said, there are some encouraging signs from the private markets that spending on breakthrough technologies is increasing (though not necessarily on R&D). For example, a recent report by the Cleantech Group and Deloitte found that venture capitalists invested $1.9 billion globally in renewable energy and other clean technology companies in the first quarter of 2010, up 83% over the same quarter last year. In addition, a recent Pew study found that new clean tech investments are expected to grow 25% to $200 billion in 2010.
V.C. funding, however, is by and large for commercialization, not for R&D. As such, we need to put in place a public strategy for funding energy technology R&D.
In addition to a pricing strategy, we also need a technology strategy.
Bill Bonvillian explains how this Energy Technology Strategy needs 5 crucial components: (1) Large in scale and scope; (2) Comparable to the Apollo project in size and scope ($185 Billion over 9 years), but not in form or organization; (3) Private sector led, with public-private partnerships; (4) Technology neutral, to avoid further technology lock-in; and (5) Organized around obstacles to market launch.
Not surprisingly, U.S. innovations like to land in unoccupied territory - the so-called "Blue Water", where no other fish swim. But the energy sector is fiercely contested, and new technologies need to be prepared for a fight. Taking more lessons from the work of Bonvillian and Weiss, we understand that such innovation needs to be: (1) "pushed" through a pipeline by federal investment in basic research; (2) "induced" through market pull; and (3) undergirded by strong innovation institutions which align the best of the government "push" with the best of the market "pull".
This innovation structure should define our culture of energy innovation in the 21st Century. The new challenge is to go into old frontiers and completely remake them with new technologies.
To take up this challenge, American innovators need to see the old energy frontier as a new frontier. It is an occupied territory, to be sure, but breakthrough technologies can re-make it anew. As I have explained, this requires 3 main components: (1) a new approach to innovation that focuses on strong innovation institutions; (2) a new technology strategy large in scale and scope; and (3) public spending in R&D in the region of $30 billion per year, to sit at the level of R&D spending in health care.
Going into new frontiers was easy, by comparison. The call today is to return to the complex energy sector, the old frontier, breaking through the walls that we ourselves constructed. We will do this with new innovative technologies, new pricing strategies, and new innovation structures.
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