The Surprising History of Energy Tech Innovation

The federal government played a crucial and often unexpected role in the decades-long technological innovations that led to the shale gas revolution, according to a new report from the staff of the American Energy Innovation Council, the latest independent investigation into the public sector origins of the North American gas glut first uncovered by the Breakthrough Institute.

The report shows how government funding and institutional support amounted to billions of dollars over three decades and a complex structure of policies that combined government and industry resources to solve a critical technological challenge: tapping a vast underground bounty of energy recently considered inaccessible. The conclusions further challenge the longstanding myth that the shale gas boom was brought about through private sector innovation alone and offer important lessons for energy innovation more broadly.

“Government support for R&D should not simply be predicated on a near-horizon, A-to-B mindset if it is to support major energy technology breakthroughs and energy market transformations,” the report concludes. “Rather, as seen in the case of unconventional gas, government contributions to energy technology innovation occur at the often unexpected intersection of a diverse array of R&D efforts over long periods of time.”

The American Energy Innovation Council (AEIC), a group of prominent business leaders including Bill Gates and Norm Augustine, came together in 2010 to highlight the importance of innovating in energy and to call for a more vigorous public and private sector commitment to energy technology innovation. The modern-day shale gas revolution is perhaps the greatest manifestation in the last few decades of this vision. Through a combination of federally-funded geologic research, public-private collaboration on demonstration project and R&D priorities, and tax policy support for unconventional technologies, the story of shale gas illustrates the difficulty and complexity of breakthrough energy technology innovation.

As the AEIC report documents, the federal government lowered risks to private sector innovation and provided complementary inputs to that innovation. Specifically, AEIC staff identified four main ways the federal government did this: through basic science and resource mapping; coordinating and complementing industry efforts; applied research and development; and tax incentives.

AEIC supplemented the initial investigation from the Breakthrough Institute by uncovering additional information about the complicated innovation ecosystem that led to today’s shale gas boom. For example, the AEIC case study explores in more detail how the public-private R&D partnership of the Gas Research Institute and the Department of Energy worked, how the Section 29 tax credit made its impact, and how microseismic monitoring developed over time.

The report verifies what has been clear to innovation scholars for some time: that government and private-sector investment not only co-exist, but actively collaborate towards mutual goals. AEIC quotes Roger H. Bezdek, President of Oil & Gas Investor:

The magnitude and scope of the DOE program were important because most firms involved in shale gas recovery at the time were small independents who had little or no research budgets. These producers could not have mounted R&D on the scale and scope of the DOE effort, nor could they have continued DOE’s level of effort during the late 1970s and 1980s. Thus, it is likely that DOE effort did not displace or substitute for R&D that would have occurred otherwise in the private sector.

The energy sector is well known for lacking the innovative culture and capability so admired in other industries like information technology and pharmaceuticals. Energy companies’ preference for stability over change was especially evident in the development of shale gas extraction technologies when “private R&D was low and risks to industry high.” But the federally housed Eastern Gas Shales Program, the federally coordinated Gas Research Institute, and the federally administered tax incentives filled the technology and investment gap and prompted sustained private interest in the long-game shale gas challenge.

Even the most generous estimates of federal spending on shale gas have been repaid many times over in the form of increased domestic energy production, lower energy costs, and increased economic activity. Estimates of shale gas investments total more than $10 billion over several decades, including $473 million in R&D support, yet the gains to US consumers from the shale revolution have been estimated at over $100 billion each year. Such are the fruits of a public-private innovation system that makes energy cheaper, cleaner, and more abundant.

The AEIC staff analysis challenges long-standing assumptions about the role of the federal government in energy technology development. First, innovation does not occur as a single, linear process; rather, many threads of effort came together from sometimes unexpected sources over a period of decades before resulting in identifiable successes. The federal government undertook R&D without being able to predict the full scope of its applications, and technologies developed in one area transferred to other domains.

Second, the government is neither the enemy of nor the primary source of technological progress. Rather, the federal government’s role is best described as enabling and catalyzing private sector technological innovation.

The shale revolution is not a product of government R&D and deployment policies working separately, but in concert. As policymakers and industry seek to carry on and replicate the successes of the unconventional gas story, they would do well to enhance our understanding of how innovation systems work best and how energy transitions actually occur.

Further Reading

Michael Shellenberger, Ted Nordhaus, Alex Trembath, and Matthew Stepp, "Where the Shale Gas Revolution Came From," The Breakthrough, May 23, 2012

Michael Shellenberger and Ted Nordhaus, "Lessons from the Shale Revolution," The American, February 22, 2012

Jane Flegal is a senior policy analyst at the Bipartisan Policy Center.

Photo Credit: Flickr User Daniel Foster