Supporting and Strengthening the Energy Innovation Process to Expand the Technological Base for Increasingly Clean Electric Power
This chapter addresses the need to expand the technological base for increasingly clean electric power by supporting and strengthening innovation in electricity generation, transmission, and distribution systems, as well as by spurring innovation in the design and integration of distributed energy generation and management systems, including efficient demand technologies. The scale of this challenge underscores the importance of investing in research and development (R&D) to discover and improve transformative innovations. The deployment of viable existing technologies is also important, but as discussed in the previous chapter, will be far from sufficient to meet the global clean energy challenge, particularly in controlling the concentrations of greenhouse gases (GHGs) in the atmosphere to hold the future rise in average global temperatures to less than 2° C over the preindustrial equilibrium in accordance with the agreement among the United States and 194 other nations at COP21(UNFCCC, 2015).
This chapter first provides additional detail regarding the importance of innovation in increasingly clean energy technologies and then looks at the key stages of the energy innovation process, describing some of the main obstacles to accelerated innovation at each stage. Finally, the chapter proposes a set of strategies for overcoming those obstacles. The broad goal is to build an innovation system that is matched to the scale of the challenges confronting the electricity sector (Lester and Hart, 2012). All of the stages in this system—research, development, demonstration, and take-up—need either increased or more flexible support or new mechanisms to address gaps. Policies designed to support innovation need to be informed by recognition that innovation takes place within an interlinked, iterative system; failure to take this system-level view may reduce the effectiveness or increase the cost of individual policies
focused on a single stage in the innovation process. In particular, the committee advises against an excessive focus on deployment initiatives at the expense of early R&D.
The primary rationales for public support for energy innovation are overcoming market failures and internalizing major externalities (Popp et al., 2010; see also Chapter 2). Government supports innovation through a range of policies, including funding technology research, development, and demonstration; facilitating the availability of capital to small and start-up businesses; providing tax incentives; and protecting intellectual property rights that provide a temporary monopoly to inventors.
General-purpose technologies (GPTs) are innovation technologies that have many potential applications for wide use and are capable of ongoing technological improvement. GPTs also enable innovation in different application sectors and create innovation complementarities that raise returns both to the GPT itself and in various application sectors as the technology improves in response to application-sector requirements. Because of these factors, GPTs tend to produce large knowledge spillovers, a form of market failure that prevents the inventors and firms that invest in innovation from appropriating the full benefits that flow from their R&D expenditures. Electricity is one example of a GPT that contributes to technological dynamism (Clarke et al., 2006). Governments have played a major role in supporting development of GPTs (Bresnahan and Trajtenberg, 1992; Janeway, 2012; Mazzucato, 2011).
The energy innovation process is a complex network of market and nonmarket institutions and incentives that includes public and private research and educational institutions; individual entrepreneurs and small entrepreneurial firms; large, mature firms; financial intermediaries ranging from large commercial and investment banks to venture capital firms and individual angel investors; local, state, and federal regulatory and standards-setting agencies and legislative units; other government agencies engaged in research, development, or procurement; and innovation users of many different kinds. These institutions and individuals are connected by a set of incentives, regulations, and laws (e.g.,
governing competition, intellectual property protection, environmental protection, building codes, and the behavior of capital markets).
The innovation process rarely starts with a lone inventor experiencing a flash of insight, but more often germinates from collaborations among teams of researchers or among designers, users, manufacturers, and others. Whatever the source, the initial insight is just the first step. If a new idea is to create value, it must be reduced to practice, that is, converted into a product, process, or service that works. It must then be tested by its users to show that it is economically viable and that there is a demand for it. Then, to have real impact, it must be “scaled”—that is, adopted by a significant fraction of the population of potential users. This means that firms must also develop profitable business models for delivering the technology to users. Most innovations continue to be refined even after they have been deployed at scale.
It is helpful to distinguish among the stages that occur in the progression from new idea or concept to large-scale deployment (Figure 3-1). The process is not linear, and important feedback loops connect these stages (Janeway, 2012; Mazzucato, 2011). Yet while the process of technological change has been depicted in other ways that show the continuous interaction among the innovation stages (see, e.g., Rubin, 2005), the activities involved in each stage are distinctly different. To accelerate the flow of energy innovations over a sustained period, all stages must be emphasized.
Option Creation/Proof of Concept
This is the first stage of the innovation process, when new possibilities for products, services, or processes are identified and developed. Option creation is closely associated with R&D, but the two are not synonymous. Advances in fundamental research often yield new insights that are translated into practical applications, but ideas for new products and services frequently arise elsewhere—for example, from observations of user behavior or as a result of conversations among different members of a design team. However, strong investment in R&D is necessary to a healthy innovation system, and contributes not just to the discovery of new possibilities but also to later stages of the innovation process. A key goal is to encourage experimentation with new concepts. Another important goal is to conduct proof-of-concept testing to establish that there are no technical showstoppers that would prevent practical realization of a new concept.
The primary goal at this stage is to enable technology developers, investors, and users to obtain credible information about cost, reliability, safety, and other dimensions of performance under conditions that approximate actual
conditions of use. In other words, the goal is to reduce technological, regulatory, and business risks to levels that would allow private investment in the first few commercial projects. Achieving this goal entails building, operating, and debugging pilot-scale and then full-scale prototypes, and often also requires proof of system—demonstrating that the new technology is compatible with other technologies with which it must interact, and that it can be integrated effectively into the larger system of which it is part. Other important tasks at this stage may include settling on standards and manufacturing and other infrastructure requirements, and identifying key legal and regulatory barriers that would need to be overcome for widespread use. Private innovators and their investors assume an increasing share of costs and risks in the demonstration stage relative to the option creation stage, and for smaller-scale innovations may assume all of the cost and risk. But for large-scale, complex, system innovations—such as central station power plants or systems for carbon capture and storage—that entail high costs, long development times, and, typically, large regulatory uncertainties, private firms are unlikely to move forward with demonstration projects unless public institutions share the costs and risks.
This stage typically involves the most forward-looking users, or perhaps those with the strongest need to use the innovation. The main goals include market development and early deployment of the various infrastructure elements needed for scale-up, such as manufacturing and distribution capabilities and other key parts of the supply chain, as well as regulatory systems and processes. At this stage, too, early adopters play a key role in learning processes, providing feedback that allows valuable features to be enhanced and practical problems to be addressed. Reliability and affordability also are typically improved at this stage.
Large-Scale Take-up/Improvements in Use
At this stage, the market and regulatory environments settle into more stable and predictable patterns. Nonetheless, designs continue to be refined, production systems and business models continue to be improved, and the behavior of customers comes to be better understood. The cumulative impact of evolutionary improvements to an energy technology or system, which may continue over a period of decades, often greatly exceeds the performance gains achieved when the technology is first brought to market.
Obstacles must be overcome at each stage of the innovation process. Some of these obstacles are referred to colloquially as “valleys of death.” They include (1) the technological “valley of death” as new concepts move from laboratory research to proof of concept, and (2) the commercialization “valley of death” as innovations move from the demonstration stage into the marketplace or early adoption stage (Figure 3-2). Figure 3-3 lists specific obstacles that hinder the progress of innovations and may be major contributors to the “valleys of death” phenomenon.
Inadequate and uncertain funding for R&D is one such obstacle. A lack of market pull at the proof-of-concept stage may be another. In addition, high capital costs (an issue for many increasingly clean electric power technologies) and free-rider or spillover effects discourage private investment and may necessitate public/private partnerships. Obstacles further downstream can include the complexity of siting for demonstration projects, inadequate standards for scale-up and demonstration of new technologies, and a lack of vehicles for financing precompetitive pilot and demonstration projects. Regulatory review also can delay utility investments and create uncertainty regarding cost recovery for utility R&D expenditures, pilot projects, and first-of-a-kind investments. The time required for demonstration of capital-intensive technologies in a regulated, risk-averse industry and a slow pace of commercial adoption undermine the value of time-limited intellectual property rights, and create gaps between the risks and time frames acceptable to venture equity investors and the availability of project debt models. The committee notes in particular that even with a pollution price providing greater market pull, these obstacles remain because they are structural features of the regulated market for power technologies.
At the early-adoption stage, unpredictable market forces and a lack of alignment between federal and state standards are common obstacles, as are risk aversion and institutional barriers among utilities and utility regulators. Lack of incentives for early adoption among major customers also plays a role. At the level of large-scale take-up/improvements in use, a market failure of particular importance is a lack of full life-cycle costs, including the costs of carbon emissions and other externalities. Still another obstacle is the absence of real-time pricing, which would help match retail prices with production costs, as discussed in detail in Chapter 6. The failure of markets to provide entrepreneurs with the expectation of an opportunity to capture the full value of increasingly clean technologies, including environmental benefits, depresses activity at the large-scale take-up stage, as well as at earlier stages in the innovation process.
Additionally, unique obstacles to innovation in the electric power industry arise from the challenges of incentivizing a regulated local distribution company or a vertically integrated utility that is the sole generator, seller, or distributor of
electricity to customers, issues discussed in greater detail in Chapter 6. Four such obstacles are particularly important:
- Obstacles to entry into the electric power industry, such as regulatory barriers, limit the development of new business models and the paths for introduction of new technology.
- Cost-of-service regulation, a widely used regulatory model, provides little incentive for a utility to innovate, as any savings tend to be passed on to customers, and the utility receives little or no reward for improvements in service beyond the minimum service quality standards imposed by regulators.
- Utilities may face first-mover risks, as costs may be disallowed if an innovation fails to perform as expected, and a utility may be criticized for not adopting a successful innovation more broadly or rapidly.
- While firms in competitive markets can rapidly innovate, learn, and, if necessary, redirect their efforts, a regulated utility may need to cycle through a lengthy regulatory review process and justify changes from previously approved practices (Malkin and Centolella, 2014).
Removing obstacles to innovation in the utility sector may require changes in utility regulation and in utility business models. Moreover, other regulatory policies and unresolved legal issues present additional obstacles to the development of specific technologies. For example, the Nuclear Regulatory Commission has focused on the licensing and regulation of light water reactors, but has not developed an adequate framework for licensing other types of advanced reactors. Similarly, the availability of low-cost carbon capture and storage (CCS) technologies has been projected to have a large impact on the long-term cost of policies designed to stabilize the atmospheric concentration of GHGs (Krey et al., 2014), but legal and regulatory uncertainty regarding larger-scale applications of CCS are an additional obstacle to innovation in these technologies. These technology-specific issues are taken up more fully in Chapter 5.
Finding 3-1: Market failures and nonmarket barriers for increasingly clean power technologies exist at all stages of the innovation process.
Some possible strategies for overcoming the obstacles at each stage of the innovation process are shown in Figure 3-4. The figure combines solutions for
the demonstration and early-adoption stages, as they are difficult to distinguish. While the proposed strategies are not comprehensive, they were selected to address the major obstacles in the innovation system while leveraging federal, state, regional, and private-sector capabilities and models with demonstrated applicability.
It is important to emphasize that public support needs to address all stages of the energy innovation process, not just fundamental research and improvements in use (Lester and Hart, 2012). Support for early-stage research will increase the rate at which new options are created but will have much less impact on the intermediate stages of the process, in which many of the greatest obstacles to innovation arise. Some strategies call for federal leadership to address gaps in the innovation system and enable new breakthroughs to advance to become market solutions, while others call for federal support for state and regional initiatives.
The case for strengthening the local and regional dimension of innovation policy is bolstered by the well-documented importance of local and regional innovation systems to economic development. Geographic proximity facilitates interactions among researchers, entrepreneurs, investors, potential customers, and others, and the development of local and regional entrepreneurial ecosystems is an important part of removing obstacles to innovation (Lerner, 2010). Moreover, as the dominant pattern of innovation has shifted away from the old model of closed, in-house corporate research laboratories toward more open innovation networks encompassing multiple companies specializing in different stages of the value chain, as well as universities and other public research institutions, proximity has become even more important to the innovation process (Ketels and Memedovic, 2008).
Although government policies cannot create these innovation networks, they can support their development in various ways. State and local governments and multistate entities are today supporting energy technology innovation through economic development and utility regulation policies, as well as through workforce development programs and programs designed to link entrepreneurs with local universities and research institutions (Lester and Hart, 2012). Early-stage cleantech companies need help developing their products or services; developing and proving their business models and strategies; building their teams; leveraging appropriate mentors and advisors; finding and connecting with customers and partners; and attracting capital with which to pilot, scale, and commercialize their technologies. Successful start-ups tend to cluster, as the concentration of these resources contributes significantly to venture development and a greater percentage of successful ventures. Some of the most cost-effective innovation acceleration mechanisms involve local, state, and regional governments, nonprofits, and public/private partnerships focused on building the necessary connections across a regional ecosystem to leverage regional innovation assets and economic competitiveness (Porter, 2001).
Strategies That Address Obstacles in the Early Stages: R&D and Option Creation/Proof of Concept
The Advanced Research Projects Agency-Energy (ARPA-E) is critical to the innovation pipeline because it was chartered by Congress specifically to address obstacles and market imperfections in the earlier innovation stages. The development of increasingly clean, low-carbon technologies that are both globally scalable and affordable will require exploration of a broad range of potentially transformational technologies. ARPA-E illustrates a governmental commitment to a focus on transformational innovation. The emphasis is on new technologies that go well beyond incremental improvements to provide
potentially transformational breakthroughs. ARPA-E’s goal is not to avoid risk, but to recognize risk and manage it to maximize the chances of big successes.2
Comparisons are often drawn between ARPA-E and the Defense Advanced Research Projects Agency (DARPA), after which it was modeled. However, ARPA-E and DARPA differ in three important ways:
- DARPA is funded at a level roughly 10 times higher than that of ARPA-E.
- While the Department of Defense is a likely customer for successful DARPA projects, the Department of Energy (DOE) generally is not a customer for ARPA-E projects. Finding funding and early-adoption customers is thus a more significant challenge in energy markets, especially at the proof-of-concept stage.
- At a point when the Department of Defense can support the continued development of technologies, including higher-cost technologies, that address national security risks, energy technologies must demonstrate an ability to achieve near-term commercial viability to attract private capital.3
Recommendation 3-1: DOE should direct funds to a broader portfolio of projects than will ultimately prove viable and should tolerate the inevitable failure of some experiments, while at the same time winnowing at each stage of the innovation process.
In addition to being essential to limit costs, downselecting at each stage would provide opportunities to identify at earlier stages of the innovation process technologies that are unlikely to succeed commercially (in their current
2 Congress established ARPA-E with a broad mission “to overcome the long-term and high-risk technological barriers in the development of energy technologies.” In addition, Congress established goals for ARPA-E: “(A) to enhance the economic and energy security of the United States through the development of energy technologies that result in—
(i) reductions of imports of energy from foreign sources;
(ii) reductions of energy-related emissions, including greenhouse gases; and
(iii) improvement in the energy efficiency of all economic sectors; and
(B) to ensure that the United States maintains a technological lead in developing and deploying advanced energy technologies.” 42 U.S.C.S. 149 §§16538(b) and (c) (2016).
3 The committee concluded that early indicators suggest ARPA-E generally is poised to produce a positive public return on public dollars invested. At the time this report went to press, however, another committee of the National Academies of Sciences, Engineering, and Medicine was close to completing a full evaluation of ARPA-E. The reader is referred to the report of that committee (expected to be released in late 2016) for a more detailed assessment of ARPA-E.
form). The most important objective would not be to avoid failure, but to ensure that failure is recognized, understood, and addressed without delay. This could be accomplished by ending funding for projects that failed to meet preset cost and performance improvement targets.
The committee recognizes that implementation of this recommendation, as well as others in this chapter, would require additional spending on innovation programs in a budget-constrained political environment. In some cases, existing funding could be redirected for this purpose, and budget commitments could be shifted from supporting the deployment of existing technologies or incremental improvements to existing options that would remain too expensive to the development of technologies that showed promise for becoming economically competitive. However, decisions regarding the sources for any additional funding would be the product of a political process that is beyond the scope of this study.
Still, there are actions that Congress and the Executive Branch could take to help ensure the accountability of public entities in a way that would sustain support for public participation in the early stages of innovation in energy technology—for example, creating firewalls between elected officials and program administrators to limit political influence and the perception of political influence on funding. Also helpful would be to give agencies legal authority to establish personnel policies that would ensure professionalism in program administration. For example, both DARPA and ARPA-E are allowed to hire key technical personnel on time-limited terms and empower them to suggest what projects to support. Thus both agencies are able to attract highly qualified personnel, often from preeminent research institutions and other notable organizations. Additionally, high levels of transparency (including reporting of successes and failures), proactive communications, and independent program reviews provide information needed to assess performance and maintain accountability.
Strategies That Address Obstacles in the Intermediate Stages: Demonstration and Early Adoption
While much policy attention is focused on the early and late stages of the innovation process, some of the most significant barriers to innovation occur at the intermediate stages of demonstration and early adoption. As innovations approach the point of commercialization, their capital requirements typically increase significantly, as does the importance of engagement with markets, customers, and private investors. As discussed previously, much of this activity takes place most effectively in local and regional energy markets and innovation systems, and especially at these intermediate stages of the innovation process, the federal government needs to augment its own leadership roles with support for regional, state, and local innovation initiatives.
Federal Sector-Specific Technology Road Mapping and Challenge Funding
Federal sector-specific road mapping and challenge funding developed with specific technology development milestones have been used effectively to drive private-sector innovation and investment, as well as DOE programs and grants in the proof-of-concept and demonstration stages. In other industries, projects with a clearly defined mission have been most successful at achieving the desired outcomes (Janeway, 2012).
DOE has used its expertise to analyze the technology readiness of specific energy technology categories (see Chapter 2 and Appendix D), and to develop road maps that consider targets for spurring innovation at the component and supply chain levels to meet levelized cost of electricity goals for each specific technology. These analyses and road mapping efforts are not aimed at addressing the new, disruptive breakthrough ideas that ARPA-E performers may consider. Rather, they are more focused on specific sectors that have understood product architectures and components, and in which improvements across every component of a deployed solution (including advances that reduce the cost of deployment) can be targeted for a significant combined improvement and competitiveness in energy markets.
An excellent example of this model is DOE’s SunShot Initiative, whose mission is to make solar energy fully cost-competitive with traditional energy sources by 2020. According to DOE, “The SunShot Initiative aims to reduce the total installed cost of solar energy systems to $0.06 per kilowatt-hour (kWh) by 2020. Today, SunShot is about 70% of its way toward achieving the program’s goal, halfway into the program’s ten year timeline. Since SunShot’s launch in 2011, the average price per kWh of a utility-scale photovoltaic (PV) project has dropped from about $.21 to $.11” (DOE, 2016a). Additionally, SunShot is funding research into next-generation solar technologies with “the potential to dramatically lower costs and/or increase efficiencies of PV module[s] beyond the SunShot targets of $0.50/W and 20%, respectively” (DOE, 2014d). SunShot has developed a detailed technology road map for every major PV component. The program is organized around a series of challenge solicitations that consider competitive proposals from companies, laboratories, and universities for R&D grants targeted to achieving these specific road map milestones. Amounts for most SunShot grants are between $100,000 and several million dollars, with varying degrees of matching funds required. In addition to funding, the SunShot Initiative includes working groups and conferences that are well attended by researchers and innovators across the solar PV sector, and serves as an accelerator of competitive ideas in all areas of solar-related innovation.
DOE’s Quadrennial Energy Review and other DOE research already provide major portions of the research and road map planning necessary to consider initiatives similar to SunShot for other energy sectors and technologies. DOE could compile these research insights and develop road map challenge initiatives to align its own program areas and programs supported by the
national laboratories with a clearly defined mission to support the timely development of affordable, scalable technologies that could effectively mitigate potential GHG impacts. In some areas, this might require redirecting DOE and national laboratory R&D programs toward the achievement of more ambitious cost and performance objectives. The funding for these challenges could be provided by a pooling of current R&D funds, including Small Business Innovation Research (SBIR) funds from DOE and other agencies, such as the Department of Defense, the National Science Foundation, the Department of Agriculture, and others, that are customers of or have expertise in the markets for those specific technologies. DOE could use road mapping and challenge funding to set targets and funding priorities consistent with a clearly defined mission for the timely development of technologies that could enable an affordable global transition to low-carbon energy resources.
Inducement prizes are another way to accelerate certain types of innovation, and could be a valuable addition to the federal, state, regional, nonprofit, and private-sector increasingly clean energy innovation toolkit. Inducement prizes are particularly relevant at the proof-of-concept and early demonstration stages, and in cases when efforts such as sector-specific road mapping or the Quadrennial Energy Review have determined that a goal may require a stepwise change in performance or a novel integration of components and ideas from both known and unknown areas. DARPA has used comparable grand challenges to accelerate major advances in such fields as autonomous vehicle control. These prizes would be intended to incentivize new ideas at these early and middle stages, but prior to full-scale demonstration. If supported by expert judgment, prizes also could be used to help ensure the deployment of market-ready advanced technology at an appropriate price point.
Prizes can be an alternative or a supplement to grant funding and might be used in place of additional, less narrowly targeted inducements to promote learning by doing and learning by searching (discussed in NRC, 2007). Prizes tend to be most appropriate when the objective is clear,4
4 In the demonstration and commercialization/early-adoption stages, contestants are demonstrating a proof of system (combinations of technologies that together represent a new system or application) that with definable additional steps could be commercialized and brought to market. At a stage at which the potential for commercial applications becomes apparent, prize contests are more likely to provide reputational benefits to successful participants and elicit third-party financing for contest participants. For prizes linked to commercialization and deployment, the prize (e.g., credible advance market commitments, deployment incentives with specified qualification requirements, or intellectual property rights buyouts) can ensure reasonable pricing and achieve such other conditions as may be necessary to facilitate broad adoption.
but when the path to achieving that objective is not. In such cases, the competition will invite alternative approaches, and the contest objective will serve as a surrogate for success in a competitive market. For the prize to work, however, clear criteria for victory must be established, and it must be possible to measure performance. The contest objective needs to be achievable in a reasonable amount of time (e.g., 2 to 10 years). In addition, prizes are most suitable when there are many potential contestants who could produce a winning solution—for example, when the prize captures the imagination of the public or within a field and can attract the participation of contestants or teams from diverse backgrounds, ideally including those that ordinarily might not participate in research grants or contracts.
Prizes have grown in consideration, authorization, and use in recent years. In response to a request from the National Economic Council, a National Academy of Engineering workshop assessed the potential value of federally sponsored prizes and contests in advancing science and technology in the public interest. The workshop’s steering committee recommended that “Congress encourage federal agencies to experiment more extensively with inducement prize contests in science and technology” (NRC, 1999, p. 1). This recommendation reflected the following views of the steering committee:
When compared with traditional research grants and procurement contracts, inducement prizes appear to have several comparative strengths which may be advantageous in the pursuit of particular scientific and technological objectives. Specifically, these include:
- The ability of prize contests to attract a broader spectrum of ideas and participants by reducing the costs and other bureaucratic barriers to participation by individuals or firms;
- The ability of federal agencies to shift more of the risk for achieving or striving toward a prize objective from the agency proper to the contestants;
- The potential of prize contests for leveraging the financial resources of sponsors; and
- The capacity of prizes for educating, inspiring, and occasionally mobilizing the public with respect to particular scientific, technological, and societal objectives. (NRC, 1999, p. 1)
The steering committee viewed inducement prizes as “a complement to the primary instruments of direct federal support of research and innovation—peer-reviewed grants and procurement contracts” (NRC, 1999, p. 1).
A 2007 National Research Council study on inducement prizes at the National Science Foundation (NSF) produced this finding:
Inducement prize contests are clearly not well suited to all research and innovation objectives. But through the staging of competitions they are thought to have in many circumstances the virtue of focusing multiple group and individual efforts and resources on a scientifically or socially worthwhile goal without specifying how the goal is to be accomplished and by paying a fixed purse only to the contestant with the best or first solution. Inducement prize contests with low administrative barriers to entry can attract a diverse range of talent and stimulate interest in the enterprise well beyond the participant pool. (NRC, 2007, p. 1)
The National Research Council concluded that “…an ambitious program of innovation inducement prize contests will be a sound investment in strengthening the infrastructure for U.S. innovation” (NRC, 2007, p. 2). Further, it found that the area of “low carbon energy systems,” among others, “has potential to yield one or more worthy prize contests” (NRC, 2007, p. 6).
An expansion of the number and size of government, private-sector, and public/private-sponsored prize contests has occurred over the last decade. Purses increased from $74 million in prize competitions with awards of more than $100,000 in 1997 to $315 million in such competitions in 2007 (McKinsey & Company, 2009). Prizes in the category of climate and environment increased from $6 million to $77 million, in science and engineering from $18 million to $88 million, and in aviation and space from $12 million to $88 million. Together these categories went from accounting for fewer than half of large prize competitions in 1997 to 80 percent by 2007 (McKinsey & Company, 2009).
In addition, there has been a recent expansion of federal authority to use inducement prizes, translating to valuable experience that can continue to be tapped in appropriate situations:
- Section 1008 of the Energy Policy Act of 2005 (EPACT) gives the secretary of energy authority to award cash prizes of $10 million for “breakthrough achievements in research, development, demonstration, and commercial application” that are related to DOE’s mission. It also gives the secretary of energy authority to award “Freedom Prizes” of $5 million for innovations that reduce dependence on foreign oil.
- Section 105 of the America COMPETES Reauthorization Act of 2010 gives all federal agencies broad authority to conduct prize competitions and includes provisions for different aspects of prize
design, implementation, and oversight. In particular, this act authorizes the use of prizes for one or more of the following:
- − find solutions to well-defined problems;
- − identify and promote broad ideas and practices, and attract attention to them;
- − promote participation to change the behavior of contestants or develop their skills; and
- − stimulate innovations with the potential to advance agencies’ missions.
- The America COMPETES Reauthorization Act of 2010 also allows agencies to accept funds for cash prizes from other federal agencies and the private sector; allows agencies to enter into agreements with private, nonprofit entities to administer a prize competition; and requires reporting of prize activity for each fiscal year.
Recommendation 3-2: The federal government, including DOE, should continue to expand the appropriate use of inducement prizes as a complement to patents, grants, procurement contracts, and other types of support for energy innovation.
An inducement prize for increasingly clean power and energy-efficiency technologies should follow certain criteria, consistent with the findings and recommendations of previous National Research Council studies on inducement prices (NRC, 2007). First, these prizes should take advantage of the development of additional energy technology road maps and the Quadrennial Energy Review led by DOE. In addition, sponsors, including DOE, should consult with experts, affected parties, and categories of potential participants in choosing prize topics and objectives. DOE should consult with experts regarding circumstances in which deployment prizes should be used to reduce economic welfare losses from monopoly pricing of patent rights or to supplement undervalued patent rights for low-carbon and other increasingly clean energy technologies, as well as the most appropriate designs for such deployment-related prizes (targeted deployment prizes, advance market commitments, cost/pricing conditions, or intellectual property rights buyouts).
Given the recent growth in energy-related prize competitions and the National Research Council’s prior recommendations, DOE could undertake efforts to evaluate such competitions as was laid out for NSF in 2007 (NRC, 2007). These could include considering whether the desired technology might have been developed more quickly or a more effective version of the technology might have been developed if the structure of the competition had been different. The ongoing learning and experience from these efforts should be applied to prize competitions across DOE. DOE could also appoint a coordinator of innovation prizes in the office of the under secretary—a step comparable to
what the National Research Council previously recommended for NSF—to manage the administration of prize competitions in conjunction with applicable program offices (NRC, 2007, p. 24). This office could coordinate and support consultation experts, affected parties, and potential contest participants; administer or contract for the efficient administration of prizes; and coordinate the evaluation of prize contests to identify lessons learned that could be used to improve future competitions.
In addition, given the global nature of climate change, the development of increasingly clean energy options should have a global component. The commitment of 20 nations to Mission Innovation5 during the December 2015 United Nations Framework on Climate Change 21st Annual Conference of Parties (COP21) is aimed at accelerating global clean energy innovation, with the objective of making clean energy widely affordable.6 Each of the participating countries will seek to increase governmental and/or state-directed clean energy R&D investment over 5 years. New investments will be focused on transformational clean energy innovations that can be scaled to address varying economic and energy market conditions.
These national commitments are linked to a private initiative—the Breakthrough Energy Coalition—supported by more than 20 institutional and wealthy individual investors. The Breakthrough Coalition was developed to “add the skills and resources of leading investors with experience in driving innovation from the lab to the marketplace.” Its development was based on a recognition that “in the current business environment, the risk-reward balance for early-stage investing in potentially transformative energy systems is unlikely to meet the market tests of traditional angel or VC [venture capital] investors,” and that “even the most promising ideas face daunting commercialization challenges and a nearly impassable Valley of Death between promising concept and viable product, which neither government funding nor conventional private investment can bridge” (Breakthrough Energy Coalition, n.d.). The coalition is creating a network of private capital to accelerate early investments in a broad range of reliable, affordable energy technologies that do not produce carbon.7
6 The participating countries account for more than 80 percent of current clean energy R&D and include the 12 largest national economies (based on 2015 gross domestic product). The countries making the initial pledges to Mission Innovation are Australia, Brazil, Canada, Chile, China, Denmark, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Norway, Saudi Arabia, Sweden, the United Arab Emirates, the United Kingdom, and the United States.
7 For additional information on inducement prizes, see Adler (2011), Brunt et al. (2011), Dalberg Global Development Advisors (2013), Davis and Davis (2004), Kay (2011, 2013), Kremer (1998), Newell and Wilson (2005), Nicholas (2011, 2013), Williams (2012); see also https://www.challenge.gov.
Finding 3-2: The development of affordable, reliable, widely available increasingly clean energy technologies that can be rapidly deployed in both developed and developing economies will be enhanced by public/private collaborations and international partnerships.
Regional Energy Innovation and Development Institutes (REIDIs)
Electricity markets are regional, and different regions have differing energy resources, fuel- and technology-specific R&D capabilities, and regulatory and market structures that create varying incentives and opportunities for new increasingly clean energy technologies. Public/private partnerships to accelerate new market development and evolve regulations for new entrants are being formed in clusters and regions. The United States has a significant number of emerging increasingly clean energy clusters, as well as regional initiatives designed to connect the region’s innovation resources with early-stage ventures. Federal policy for energy innovation can take advantage of the strengths of these regional differences in innovation conditions, capabilities, and priorities.
A local, state, or regional public/private partnership—what the committee refers to as a regional energy innovation and development institute (REIDI)—could be created to help spur the development of both early-stage innovations and innovations that show appropriate promise. This type of regional institute structure would complement federal innovation agencies and programs such as ARPA-E, SunShot, and DARPA. It would extend support after proof of concept through a technology’s optimization, iterative prototyping, piloting, testing, and readiness for commercial demonstration. It would help accelerate the movement of technologies through the middle stages of the innovation process by developing institutional capabilities specifically tailored to the earlier-detailed obstacles to development commonly faced by energy technologies. And with input from potential users, it should be able to address potential barriers to market adoption.
The committee estimates that an optimal annual budget for a REIDI would range from $2 million to $40 million and would be linked to scale (whether it covered a metropolitan area, a state, or a multistate region), scope (whether it had a focus on a small or large number of technologies or markets), and stage of development (whether it was a nascent organization focusing on early-state proof of concept and business validation or had the capability and partnerships to accelerate innovations through development to reach commercial demonstration readiness). The amount of funding support provided to an individual project would depend on the innovation stage. An appropriate scale for early start-ups would be $50,000 to $500,000, while more advanced ventures might need between $500,000 and $5 million, even if they already had private funding, to demonstrate commercial potential quickly.
A network of these regional institutes would facilitate access where capabilities already exist. Where capabilities may not yet exist to meet anticipated needs, networked institutes could help identify likely development needs for promising technologies and fund or plan and create the support capabilities, physical infrastructure (where applicable), and translational relationships often needed for four activities that can accelerate innovation in energy technology:
- accelerating (or paralleling) the development of standards and specifications for related physical, information, and/or control architectures and implementation or integration templates; and
- certifying products using appropriate proof-of-system test protocols.
As new energy technologies move beyond laboratory research to prototype development and beyond, they require funding, services, expertise, and market connections to develop a commercial prototype product and prove its basic market viability. Individual institutes could develop general capabilities to expedite the movement of technologies through the middle stages of the innovation process. If national laboratories participated, they could support a translational approach to accelerating development by providing core capabilities for some regional institutes in partnership with other institutions and potential customers. A recently initiated example of national laboratory involvement in promoting clean energy innovation is Cyclotron Road, housed at Lawrence Berkeley National Laboratory. Where the regional institutes created new simulation and testing capabilities, they would also be participants in the Technology Test Bed and Simulation Network described below, along with other organizations. Some of the activities supported by the regional institutes, such as standards development, would be coordinated at the national level through the proposed National Network for Advancing Translational Clean Energy Technologies (NNATCET), also detailed later.
While ARPA-E is an important funder for technical development and derisking for some potential breakthrough technologies, ARPA-E by itself is not in a position to address many of the business-related risks and is not designed to support achievement of all the milestones for commercialization of promising innovations. However, some of the resources most actively and successfully supporting the acceleration and development of innovation at this early stage tend to come together in the country’s regional innovation clusters,8 presenting
8 The U.S. Cluster Mapping Project, led by Professor Michael Porter, Institute for Strategy and Competitiveness, Harvard Business School, and built with funding support from the Department of Commerce’s Economic Development Administration (EDA), lists hundreds of organizations in one or several categories addressing early-stage energy
an important opportunity for the federal government to follow and build on state and regional initiatives.
REIDIs would be energy-specific venture development organizations (VDOs) that would add several capabilities specific to the energy innovation system and its needs. As defined by the Department of Commerce,9 a VDO is a “business-driven, public or nonprofit organization that promotes regional growth by providing a flexible portfolio of services, including: assisting in the creation of high-growth companies; providing expert business assistance to those companies; facilitating or making direct financial investments; and, speeding the commercialization of technology.” VDOs sit at the center of a regional network of universities, laboratories, technology development organizations, incubators, accelerators, state programs, entrepreneurial networks, industry organizations, private capital communities, and other partners. REIDIs, as energy-specific VDOs, would bring together and apply the regions’ energy innovation capabilities to develop and accelerate those projects and ventures with the most promising new energy technologies through early-stage proof of concept, pilot, and commercial readiness.10 There are dozens of REIDI-like organizations (or nascent efforts to form such organizations) across the United States. Most of them are modestly funded at several hundred thousand to the low millions of dollars per year, and most are only a few years old.
REIDIs and their partners would in some ways complement ARPA-E, but could become involved with promising innovation projects at the earlier formative stages, and could remain engaged beyond ARPA-E early technical support to help innovations reach viability for commercial demonstration. Modest levels of public support provided when a promising technology is completing a proof-of-concept demonstration or further testing can have a significant impact on the subsequent ability to access venture capital and generate revenue. Small high-tech firms have been able to compete for limited awards from DOE’s SBIR program. A recent working paper suggests that a small grant of $150,000 approximately doubles the recipient firm’s chance of subsequently obtaining venture capital, leads on average to the award of an additional 1.5 patents within 3 years, and increases the probability that the firm will earn revenue and either be acquired or transition to an initial public offering. At this stage, modest public support can reduce uncertainty and risk
innovationdevelopment(http://clustermapping.us/organization-type/cluster-organizations-and-initiatives;http://clustermapping.us/organization-type/innovation-and-entre-preneurship-centers; and http://clustermapping.us/search/site/Regional%20Energy%20Innovation).
9 VDOs are defined by the EDA Initiative on Regional Innovation, http://regionalinnovation.org/content.cfm?article=fundamental-characteristics.
10 VDOs and the partners they assemble are represented by the EDA support to the Regional Innovation Acceleration Network, http://regionalinnovation.org/content.cfm?article=about-rian.
without crowding out private capital (Howell, 2015).11 By diversifying the evaluation of promising innovation projects that are in their formative stages and connecting such projects to potential partners, the modest financial support available from REIDIs could leverage greater access to candidate projects and complement DOE’s SBIR program.
Beyond funding, REIDIs would serve an important role in the middle stages of innovation because they would focus on the following:
- Innovation acceleration—providing support and modest innovation funding and services to promising projects; supporting technology development, but with an additional focus on leveraging local resources of mentors, customers, investors, entrepreneurs, teams, and early-adoption market connections to help new innovations prove their business and economic value.
- Market and cluster research—focused on regional market and cluster potential, and seeking to connect cluster and market needs to innovators and innovation concepts to rapid market feedback.
- Access to technical resources—including developing and supporting access to a regional network of test beds and simulation modeling laboratories, and coordinating the leveraging and growth of test resources with the recommended national Technology Test Bed and Simulation Network (as described below).
- Ecosystem development—programs designed to develop and leverage regional innovation resources (including mentors; experienced entrepreneurs; customers; partners; R&D facilities, including national laboratories; test sites; capital providers; educators; and team members); initiatives to invest in regional assets for incubation, acceleration, R&D, business development, mentoring, and education.
- Policy and regulatory alignment—initiatives to change the policy and regulatory structures to eliminate obstacles and implement market signals for emerging categories of increasingly clean technologies.
- Smart deployment—initiatives to stimulate market demand, siting processes, customer and innovator connections, business development connections, and early-adoption customers for emerging increasingly clean technologies (including the public sector as customer).
11 Professor Howell’s results came from analyzing outcomes for small firms receiving SBIR Phase I grants.
12 DOE’s Innovation Ecosystem Development Initiative awarded more than $5 million to research institutions and universities across the nation to “nurture and mentor clean energy entrepreneurs.”
Department of Commerce (EDA, 2011),13 and the Small Business Administration (Regional Innovation Cluster program),14 these regional efforts are still relatively disconnected from federal partnerships, and their funding and operating levels are below what is required for sustainability. Additionally, many other regions of the country have the potential to house regional increasingly clean energy innovation clusters, but have lacked a model and formative support for initial programs and partnerships.
The most recent example of federal recognition of and support for REIDI-like entities (albeit at very modest funding levels) is the announcement of DOE’s National Incubator Initiative for Clean Energy. DOE competitively selected three regional partnerships from the Midwest, Texas, and California to receive federal support “to run innovative programs with commercialization services for startups including mentorship, business development, capital access, and testing and demonstration” (DOE, 2014c). DOE also made funds available to sponsor two institutes of the National Network for Manufacturing Innovation. As of this writing (2016), DOE has announced that it will provide $70 million to support an institute that will “enable the development and widespread deployment of key industrial platform technologies that will dramatically reduce life-cycle energy consumption and carbon emissions associated with industrial-scale materials production and processing through the development of technologies for reuse, recycling, and remanufacturing of materials” (DOE, 2016b). DOE also has established another institute, PowerAmerica, to support the development, demonstration, and deployment of advanced power electronics.15 PowerAmerica 16 primarily creates technology road maps and funds demonstrations, with a stated aim of improving device performance and reducing the perceived risk of adoption by industry.
As these examples show, REIDI-like entities may be the lead organizations supporting projects at the earliest postresearch stage to help projects reach proof of concept and market need. These entities can partner with sources of private capital, corporate investors, and others that often invest after proof of concept. The innovation resources and partnerships they assemble can help ventures with private funding to reduce the capital and time requirements for prototyping, testing, business/market/economic assessments, connections to potential customers and markets (leveraging the regional clustering of utilities, engineering and construction firms, energy service companies, manufacturers,
13 The i6 Green Challenge in 2011 made $12 million available to six teams across the country “with the most innovative ideas to drive technology commercialization and entrepreneurship in support of a green innovation economy” and new jobs.
15 Power electronics can reduce losses of electricity during its transmission and distribution, enable greater grid penetration of intermittent increasingly clean power technologies, and increase the energy efficiency of semiconductors.
etc.), and other venture development milestones to reach commercial demonstration readiness. Many investors at the venture and similar stages lack the technical capability to assess which energy technologies hold the greatest potential. Because of the technical expertise they offer, REIDI-like entities can help private investors do exactly this and thereby lower the technical risk.
Given the regional diversity of the U.S. economy, these entities can have a variety of organizational forms and priority areas of focus. They can be a single nonprofit, or more of a partnership, network, or consortium that brings together many of the incubator, accelerator state program, academic, laboratory, business, entrepreneurial, capital, market, and other regional energy innovation resources in their region. They may be focused on specific targeted technology and market intersections, based on the characteristics and assets of their regional economies. Alternatively, in regions such as the Northeast and California where research, industry, markets, and expertise cover many technology and market segments, they may be more broadly based.
Finding 3-3: REIDIs could help sustain the development of promising technologies and ameliorate funding gaps associated with achieving intermediate milestones as technologies move toward commercialization, including gaps that are not covered by federal programs such as ARPA-E.
The funding for these REIDIs could come from an equal match of federal and regional funds, with the regional funds derived from state and private-sector sources, including potential allocation of electricity sector systems benefit charges or other funds allocated to accelerating increasingly clean energy innovation. The latter funds could include new electricity system charges similar to the Network Innovation Competition funding allocation that is a key part of the new U.K. regulatory model RIIO (Revenue set to deliver strong Incentives, Innovation and Outputs) (see the section on “Dedicated Innovation Budgets and Roles for Utilities” in Chapter 6). Federal funding might over time require more than a 1:1 regional match to encourage multiple regional funding partnerships. However, federal funds would need to be flexible enough to support the majority of the operating capital required to launch new REIDIs. Federal funds would also need to be flexible enough to support a REIDI’s general operations, enabling the majority of regional funds to be deployed for innovation programs and support for promising entrepreneurial ventures.
The combined budgets for an assortment of REIDIs spread across the United States might eventually reach $250 million, with scaling to this level over a 5- to 10-year period. Modest federal funding support would be critical to incentivize states, regions, state regulators, and private companies to come together to provide matching regional funds for these institutes. The federal government could consider creating a dedicated office—likely within DOE—to
help coordinate and provide support to REIDIs and a mechanism for sharing best practices across the institutes through the proposed NNATCET.
The NNATCET could be a joint operation across DOE, reporting directly to the secretary of energy and shared across the major technology offices, such as Electricity Delivery and Energy Reliability, Energy Efficiency and Renewable Energy, Fossil Energy, and Nuclear Energy, plus the Office of Science. Its annual budget might start at $50 million and grow over 5-10 years to reach $150 million. Approximately $125 million would be allocated as matching funds to the REIDIs, with the remaining $25 million supporting NNATCET operations, development and sharing of best practices, related events and programs, and the flexible ability to seed regional innovation initiatives with the potential to become regionally supported REIDIs. The NNATCET also would have the flexibility to support new initiatives designed to address gaps in the REIDI network.
At a minimum, the NNATCET would act as a source of structured support for the REIDIs, verifying their quality and output and providing financial support for their operating capabilities; investments in their regions’ innovation resources; and specific energy technology projects at the prototype, pilot, demonstration, and field test stages. The NNATCET might also be the logical home for a broader energy innovation-enabling initiative that could facilitate the movement of technologies from laboratory to market by supporting dispersed components of the larger energy innovation system. In this capacity, the NNATCET would additionally promote collaboration and resource sharing among the regional organizations to facilitate knowledge transfer and guard against unnecessary redundancy, offer a source of streamlined support for navigating regulatory processes and for updating relevant regulations and market policies, and provide a checkpoint for the dissemination of all federal financial support to these organizations.
Public/Private Venture Funds
Although venture capital accounts for a modest fraction of total investments in increasingly clean energy technology, it plays a critical role in the innovation system. Venture capital contributes to the development of prototype and pilot-scale technologies and new business ventures. In 2001, venture capital investment in clean energy technology totaled on the order of $500 million, representing about 1 percent of total venture capital investments in U.S. companies. By 2011, investments in U.S. cleantech companies had peaked at about $7.5 billion, or 25 percent of total venture capital investment in U.S. companies. Since that peak, venture capital investments in increasingly clean energy technologies have declined, although they may have stabilized in 2015 at around half the 2011 peak (BNEF, 2016; Clean Edge, 2014).
Observers of venture capital and equity investment markets explain this decrease by pointing to the mismatch between the business model of venture
capital funds and the needs of increasingly clean energy entrepreneurs. Venture capitalists invest in early-stage companies and plan to exit after 4-7 years, whereas energy technologies typically require much more time before an investor can exit (Schwienbacher, 2008). Similarly, venture capitalists typically can make investments at the level of $500,000 for seed funding to about $2.5 million for initial investment in growth companies. The capital needs for energy technologies, however, can be significantly greater just to complete proof of concept. Moreover, many energy technologies require significant capital to evaluate technical performance and thus reduce technical risk. Venture capital firms, on the other hand, are generally much better suited to assessing market opportunity and operational risks for a given venture (Madison Park Group, n.d.).17
It is not surprising, then, that venture capital typically will not be the lead source of financing for demonstration and early-adoption activities. At these stages, project debt and other demonstration financing mechanisms are needed, including the Regional Innovation Demonstration Funds proposed in this report (discussed in the next section). However, venture capital can serve as the lead source of capital in the early stage of innovation if providers of new venture capital funds are able to adjust their risk profile, their capital return expectations, and the life of their fund to be appropriate for cleantech early-stage opportunities. In this section, the committee discusses the potential benefits of an expansion of the Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program for cleantech early-stage public-private venture funds to address this issue.
Through the SBIC program, the federal government has been a provider of matching funds to catalyze new privately managed investment funds for important sectors with private-sector capital gaps. The SBIC program has been in existence since 1958. Since then, SBA has licensed more than 2,100 SBIC funds that have invested more than $67 billion in total, roughly 64 percent being private capital, in American small businesses (SBA, 2016c).18 These include early investments in information technology companies such as HP, Apple, and Intel. However, there have been very few SBIC-licensed funds for early-stage cleantech innovation.
The topic of structured public participation in privately administered venture capital funds is addressed by Lerner (2009, 2010). He focuses on how to stimulate venture capital formation generally, but his analysis may provide useful lessons for energy innovation specifically. Lerner argues that governments can incentivize private investment at stages typically attractive to
17 According to the venture capitalists and other energy innovation financiers who attended the committee’s February 28, 2014, and April 8, 2014, workshops, their experience was that the venture capital business model’s available capital and timelines for investment were mismatched, often greatly, with the needs of firms developing increasingly clean energy technologies.
18 SBICs have made more than 166,000 investments.
venture capital. Common features he identifies as salient to attracting private capital include
- government matching funds provided to an investment fund;
- a buy-back or similar right whereby the private investors can buy out the government’s investment at a predetermined interest rate; and
- no government involvement in running the fund, with the government acting instead as a “limited partner” of sorts.
Lerner underscores that the use of matching funds to determine where public subsidies should go is a central feature of public participation in privately administered venture capital funds, one also used by SBIC. While there are many examples of state-supported venture capital funds and a leveraging of local and regional public/private capital structures, the success of SBIC funds in addressing early-stage capital gaps offers a valuable model for the establishment of a range of new cleantech early-stage venture funds to address the option creation/proof-of-concept stage.
More recently, the SBIC program has added a new category of qualified SBIC funds focused on “impact investments.” SBA has defined eligible impact investment categories as including start-ups through a linkage with the goals of the Start-Up America Initiative (SBA, 2016a), and has separately defined clean energy as a “sector-based impact investment” area to encourage the use of existing and new SBIC funds to address these investment areas (SBA, 2016b). To help close the important gap in early-stage venture capital for increasingly clean energy start-ups developing new innovations, SBA could be directed to set a goal of creating $1 billion in new venture capital funds focused on early-stage increasingly clean energy technologies.
A fund focused on clean energy could be created if SBA were to phase in a “carve-out” of current SBIC funding allocations, aiming for 20 percent of current SBIC commitments, or $440 million in federal funds out of the current $2.2 billion/year SBIC allocation. Doing so would allow SBA to license dedicated cleantech funds that would be focused on directing significant portions of capital allocation to early-stage innovation, that would have lives of longer than 10 years to better match cleantech commercialization timelines, and that would involve fund managers and private capital limited partners with demonstrated expertise in cleantech. Further, SBA could review its regulations defining allowable clean energy sector-based impact investments to ensure that they would support the development of increasingly clean energy technologies, including early-stage start-ups, that could result in the timely development of affordable, scalable technologies capable of effectively mitigating potential
GHG impacts.19 Given that the current distribution of private cleantech venture capital is weighted toward later-stage investments, this allocation of existing early-stage SBIC funds could have a significant impact in increasing the availability of early-stage capital for cleantech ventures.
In addition to filling funding gaps, the committee notes that market entry is a key factor in spurring innovation (Lockwood, 2013). Therefore, public policy needs to encourage new entrants into energy markets, including both new firms and established firms from other sectors (Lester and Hart, 2012). Historically, entry and innovation have been encouraged by government support for and sponsorship of competitions for funding for research at the technological frontier that have open specifications any supplier could meet.
Technology Test Bed and Simulation Network
Increasingly clean energy innovations would benefit substantially from a national Technology Test Bed and Simulation Network. One of the most significant challenges for developers of new cleantech innovations is to find partners and resources for effectively testing their innovations, or to avoid some of the cost and time of expensive testing with appropriate simulation systems.20 Opportunities to connect new innovations to uniquely relevant test sites and simulation modeling resources could provide value by lowering the cost and time requirements for testing and development, as well as by confirming the expertise of validated external assessments. The needs of innovators vary widely—from simulation modeling and testing laboratories, to materials and component laboratory testing, to small pilot testing, and eventually to full-scale demonstration projects. A network of test beds and simulation laboratories would be instrumental in accelerating the development of increasingly clean energy technologies.
Such a network would provide streamlined identification of and access to new and existing federal, state, regional, and private testing resources; simulation modeling and testing laboratories; and preconfigured test sites. This network would also have funds with which to analyze gaps in the national network, and run solicitations and provide partial funding for the development of new test bed and simulation resources that could cost-effectively accelerate the testing and development of important technology categories.
This network would also work closely with the proposed Federal Technology Road Mapping and Challenge Fund (discussed above) to align test and simulation assets with those projects. The specific road map milestones and
19 Relevant energy savings activities are defined in detail in the “Definitions” section of the SBIC program regulations (13 CFR 107.50), http://www.gpo.gov/fdsys/pkg/CFR2013-title13-vol1/pdf/CFR-2013-title13-vol1-sec107-50.pdf.
challenge grant opportunities would benefit from linkage to test sites that were preconfigured for cost-effective testing (and possibly certification) of technology performance. These include current DOE-funded test beds, such as the National Wind Technology Center and the Pacific Northwest National Laboratory (PNNL) Smart Grid Test Bed, as well as national laboratory user facilities, many of which have relevant capabilities but can be difficult to access. They also include other relevant federal resources from the General Services Administration and, most important, from the significant Department of Defense facilities in the United States and potentially worldwide. This is an area for international partnering to leverage assets across the globe. DOE partnerships already exist with China, Canada, Europe, and various developing economies. In some instances, federal support would be required for the development of new simulation capabilities and testing facilities.
To make it easier for companies with new innovations to find and access this Technology Test Bed and Simulation Network, as well as for new test sites to market their capabilities, DOE could fund the network to manage a portal and clearinghouse for individual test beds and to connect the regional test bed networks across the country, including those associated with the proposed REIDIs.
Finding 3-4: Developers of technologies in the demonstration and early-adoption stages face technological issues in determining how to translate their proofs of concept into commercial products:
- Data from larger test beds and iteration with advanced simulation models can accelerate the resolution of these issues.
- Different technologies will have different simulation and testing requirements. In some cases, these capabilities may already exist or could be developed with modest government support.
- In other cases, such as the development of nuclear test beds (see Chapter 5 for details), substantial government investments could be required.
Regional Innovation Demonstration Funds (RIDFs)
The financing of energy technology demonstration and early postdemonstration projects is challenging. Full-scale demonstrations of innovative central station electricity-generating technologies and new kinds of manufacturing facilities for distributed technologies are commonly billion-dollar-scale projects, and typically carry significant technology, market, and regulatory risks. Even relatively small-scale innovations frequently require
large, expensive projects to demonstrate the system-level impacts of their deployment at infrastructural scale. Venture equity funds are structured to finance high-risk technology development activities, but not major, billion-dollar-scale projects. Project financiers are structured to finance large assets but not to take on the risks of technology scale-up. Regulated electric utilities devote a tiny fraction of their revenues to R&D—far less each year than the cost of even a single billion-dollar project. State regulators are focused on keeping short-term electricity costs down and tend to discourage investments in new technologies, even those that promise to stabilize and reduce power costs in the longer run, if the initial cost is higher than that of incumbent technologies.
Attempts to fill this financing gap with federal funding alone face significant obstacles. Some initiatives, such as proposals to establish a federal infrastructure bank, are not designed to address projects with significant technology risk. Other, more targeted proposals, such as those to create a federal Clean Energy Deployment Administration or a federal demonstration corporation, have not progressed. DOE’s loan guarantee programs are valuable resources for energy innovators, but loan authorities are modest compared with the scale of the need. Several states have launched “green banks” or clean energy financing authorities, drawing on a range of funding sources that include federal and state grants, bond issues, on-bill repayment mechanisms, and state ratepayer surcharges. For the most part, however, these initiatives are focused on financing the deployment of proven, commercially available technologies with low technology risk.
The committee proposes a new, decentralized strategy for financing energy technology demonstration, early adoption, and scale-up projects, with an enhanced role for states and regions and a new kind of partnership among the federal government, the states, private innovators, and investors. The public funds would be drawn primarily from state-level electric power system public benefit charges or from state and regional carbon mitigation programs, such as the California cap-and-trade program and the Northeast Regional Greenhouse Gas Initiative. The state funds would be augmented by supplementary federal grants to incentivize the creation of regional funding pools and partnerships (Lester and Hart, 2015). The new funding mechanism would specifically target projects designed to demonstrate the performance of potentially transformative energy technologies at commercial scale.
The creation of a network of Regional Innovation Demonstration Funds (RIDFs), staffed by experienced professional technology and project investors, would help reduce the costs and risks and increase the volume of private financing for the intermediate stages of the energy innovation process. The governors of RIDF member states would appoint the members of the RIDF governing board. This arrangement would create new opportunities for regional differences in energy innovation needs and preferences to be expressed at the demonstration stage and would give states a direct stake in innovation outcomes.
RIDFs would be staffed by experienced professional technology and project investors and would manage the regionally aggregated funds. RIDFs could provide multiyear grants to selected projects. These grants would augment private investments in first-of-a-kind commercial-scale demonstrations and “next few” post-demonstration projects with significant technology and/or regulatory risk.
To receive RIDF funds, projects would first have to be certified by an independent Energy Innovation Board comprising individuals publicly acknowledged as authorities in the fields of energy and environmental science, engineering, economics, manufacturing, and business management. Members would be appointed by the secretary of energy. The board also would be able to hire consultants with special expertise to assist on specific matters. The board’s role would be to certify that a project would contribute to the public goal of creating cost-competitive, scalable technology options for reducing GHG emissions. Specifically, certification would be based on the potential of the project technology to achieve significant reductions in carbon emissions at a declining unit cost over time and at delivered energy costs competitive with those of high-carbon incumbent energy systems. Certification would be granted only for a limited period, and would be withdrawn at the end of that period if progress proved too slow or if public support were no longer necessary. The Energy Innovation Board would also make recommendations to the federal grant-making authority (probably DOE) regarding incentive payments linked to the board’s annual evaluations of the overall performance of the RIDF project portfolios.
Projects precertified by the Energy Innovation Board as contributing to the public interest would seek grants from the RIDFs to augment the private financing assembled by the project team. Project teams could include technology vendors, power generators, transmission and distribution utilities, third-party energy service providers, and national laboratories and universities. Proposers would seek RIDF funding not as their primary source of finance but as a means of lowering the costs and risks of their own investments. The RIDFs would evaluate project proposals partly against standard commercial and financial criteria, including the strength of the project team, the quality of project management, and the extent of self-funding by the proposers. Most important would be the potential of the proposed project to contribute to the reduction of carbon emissions. The most attractive projects would be those with the greatest potential to stimulate major future reductions in carbon emissions while also delivering affordable, secure, and reliable energy services.
Examples of such projects could include demonstrations of integrated carbon capture, transportation and storage systems at full-scale coal- and gas-fired power plants and in different geologies, small modular light water or advanced nuclear reactor projects, grid-scale electricity storage integrated with utility-scale solar or wind systems, and next-generation offshore wind projects. Other eligible projects would include demonstrations of advanced grid
infrastructure technologies; community-scale demonstrations of grid-integrated distributed battery storage using electric vehicles; and test beds for next-generation distribution systems with advanced demand-management technologies, microgrids, distributed generation, and dynamic and differentiated pricing schemes.
Projects selected by the RIDFs would receive direct multiyear grants, with end-year funding tied to performance. Alternatively, RIDF funds could be used for customer rebates, subsidized loan programs, credit support for power purchase agreements (PPAs), or other arrangements designed to promote user engagement with the new technology. As a condition of making a grant, the RIDF would acquire a modest equity position in the project, whose ultimate value would depend on the outcome of the project and the subsequent market potential of the project technology.
Over time, a national network of RIDFs might emerge. Certified projects could be proposed to one or more RIDFs for funding, providing more opportunities for new entrants to gain support for their ideas. The RIDFs could operate independently or could co-invest with each other. Over time, some specialization of the RIDFs in technology areas of particular interest to their regions might occur (e.g., offshore wind in the Northeast, nuclear in the Southeast, carbon capture in the Midwest).
RIDFs would likely first be established in parts of the country where there is already a strong commitment to innovation and to interstate collaboration, and where there is existing state-level funding. In these locations, federal matching funds would create incentives for additional state funding. Elsewhere, federal funds would incentivize the introduction of state funding and the creation of new regional partnerships.
The federal matching funds would also be used to encourage effective RIDF investing by rewarding RIDFs whose project portfolios were ranked highly by the proposed independent federal Energy Innovation Board. The board would conduct annual reviews of RIDF portfolios, ranking most highly those combining strong representation of high-potential projects with prompt winnowing of failing projects.
Distribution of the federal matching funds to the RIDFs could be administered by DOE or by a separate, dedicated agency.21 The committee estimates that at steady state, an RIDF network covering half the country could
21 Such an agency would have some similarities to a proposal made some years ago to establish a federal Energy Technology Corporation to manage and select technology demonstration projects (Deutch, 2011). In this case, however, the federal agency would not be selecting and managing specific projects, but providing funding at the portfolio level to regional entities that would in turn be providing grants to privately managed demonstration projects. The structure proposed here is also similar to the proposal for Regional Innovation Investment Boards, State Energy Innovation Trusts, and a Federal “Gatekeeper” that would certify projects presented to the regional boards (Lester and Hart, 2012).
lead to the deployment of up to $13 billion/year in public and private funds for demonstration and early post-demonstration projects, with federal cost-matching outlays to the RIDFs accounting for as much as $2 billion/year of these expenditures (see below).
Public benefit charges would be one potential source of state funds for RIDFs. Today, about 30 states have implemented power system public benefit charges, with the revenue being used primarily to fund energy-efficiency and renewable energy projects and low-income assistance and weatherization programs. The charges range from less than 0.05 mills per kilowatt hour (kWh) in North Carolina to nearly 5 mills per kWh in California. Together, these charges produce revenues of $3.5-4 billion per year, and the average increase in electricity costs in the affected states is 2.1 percent (DOE, 2010).
Initially, only a few states might be willing to redirect existing public benefit charges to innovation financing or to implement new surcharges for this purpose. Over time, encouraged by federal matching funds, more states would likely participate, and some states might opt to use funds from other sources, such as state or regional carbon cap-and-trade or taxation schemes.22 A dedicated 1 mill per kWh electricity surcharge (adding about 1 percent to the average U.S. retail price) applied to U.S. retail electricity sales would generate roughly $3.7 billion per year, and might leverage up to twice that amount in private investment funds. A steady, predictable funding stream of more than $10 billion per year in public and private funding dedicated to financing demonstration and “next few” post-demonstration projects—enough to launch several new such projects each year—would be large enough to have a major impact on the nation’s energy innovation challenge. The magnitude of the needed federal funding is uncertain, but assuming that 50 cents of federal matching funds would be required to induce each new dollar of state funding, the federal funding requirement might start at, say, $200 million/year and would eventually grow to about $1.8 billion/year for an RIDF network covering half the country and deploying a total of $13 billion/year in public and private funds.
The regionally based public funding mechanism proposed here would have several advantages over current practice. It would create a large, dedicated funding stream for a critical part of the U.S. energy innovation system—full-scale demonstration and early-adoption projects—that has to date been chronically underresourced. RIDF grant making would not have the stop-and-go pattern that is typical of the annual federal appropriations process, and would generate the steady, predictable supplementary funding that is needed for multiyear private project investment commitments. Putting RIDF project selection decisions in the hands of technology investment professionals would make public funding responsive to market needs and the latest technological information, while the public interest would continue to be strongly represented
22 If eventually implemented, Environmental Protection Agency 111(d) regulations might encourage the introduction of more such schemes at the state and regional levels.
by the Energy Innovation Board. The new mechanism would also create opportunities for the expression of regional differences in energy innovation needs and preferences at the demonstration project selection stage, and would give states a direct stake in innovation outcomes. Finally, the mechanism would introduce multiple levels of competition into the selection of demonstration projects.
Finding 3-5: Regional efforts that leverage regional energy markets and initiatives by states, universities, entrepreneurs, industry, and others can complement federal actions to help bridge funding and commercialization gaps.
Finding 3-6: Funding and commercialization gaps for innovations in energy technologies tend to be most acute in, and most closely associated with, the early to intermediate innovation stages.
Recommendation 3-3: The federal government should provide funding and expertise to leverage regional opportunities and expertise in order to spur innovation in increasingly clean energy technology.
Examples of this funding and expertise include a number of examples discussed throughout this chapter. For example, two key strategies for addressing obstacles at the proof-of-concept and demonstration stages of increasingly clean energy technology innovation include establishing a network for advancing translational clean energy technologies to support the proposed REIDIs and allocating additional funds within the SBIC program to create new venture capital funds focused on long-term investment in early-stage increasingly clean energy technologies. Additionally, two key strategies for addressing obstacles at the intermediate stages of increasingly clean energy technology innovation include linking technology test beds and simulation laboratories into a network and providing expertise and matching funds for regionally based, competitive public/private funds that would invest in demonstration projects.
Solutions That Address Barriers at the Final Stage: Large-Scale Take-up/Improvements in Use
A national policy on carbon pricing would primarily have the effect of accelerating improvements in those technologies and business models that are already well developed, and would have less effect on early-stage development.
Absent a price on carbon and with uncertainty about the timing and magnitude of action, innovators have little incentive to invest in technology for reducing GHG emissions. Following passage of the Clean Air Act of 1970 and its amendments, innovative activity spiked (Rubin, 2014; Taylor et al., 2006; see also Acemoglu et al., 2014).23 Those innovations lowered the cost of reducing sulfur dioxide emissions from coal-burning electric power plants by creating a market for scrubber technology. Regulations on GHG emissions and other pollutants would likely lead to similar innovations and lower the cost of well-developed increasingly clean technologies (see Chapter 2).
These strategies—which include results-based regulation and new utility business models, dedicated utility funding for innovation, enabling responsive devices, recognition of volt/volt ampere reactive (VAR) optimization in rates, and on-bill repayment financing for energy-efficiency and increasingly clean energy technology—are discussed in detail in DOE, 2014d).
Further Application of Principles and Analytics
Chapter 5 explores how the above recommendations and principles could be implemented in real-world energy systems that face significant market imperfections and other obstacles to full development and utilization. The systems in question, notably nuclear generation, carbon capture, and large-scale renewables, each manifest their own technological, market, and regulatory complexities within the general context illustrated above. Such attention to the development of necessary details, on the ground as it were, is necessary to build a complete picture of an increasingly clean power system.
23 However, Acemoglu and his colleagues find that “Though it is intuitive to expect that carbon taxes should do most of the work in the optimal allocation—because they both reduce current emissions and encourage R&D directed to clean technologies—we find a major role for both carbon taxes and research subsidies” (Acemoglu et al., 2014, p. 2).
Expanding and advancing the portfolio of increasingly clean energy technology options requires analyzing and developing strategies for overcoming obstacles to innovation from R&D through pilot testing, demonstration, and deployment. Innovation has played an important role in providing the United States with secure and affordable energy resources, and governments play an important role in enabling various aspects of the nation’s energy innovation system. Given the highly distributed nature of the U.S. electricity system, markets, resources, and innovation resources, advancing increasingly clean energy options through the innovation stages discussed in this chapter also requires insights into the federal government’s opportunities to lead or to enable and leverage the efforts of states, regions, the private sector, and public/private partnerships.
The energy innovation system is a complex network of market and nonmarket institutions and incentives that includes public and private research and educational institutions; individual entrepreneurs and small entrepreneurial firms; large, mature firms; financial intermediaries ranging from large commercial and investment banks to venture capital firms and individual angel investors; local, state, and federal regulatory and standards-setting agencies and legislative units; other government agencies engaged in research, development, or procurement; and innovation users of many different kinds. This chapter has considered the obstacles that must be overcome at each stage of the innovation process, and arrived at findings and recommendations for strengthening the nation’s critically important energy innovation system. The most important priorities are identifying and creating new options, developing and demonstrating the efficacy of these options, and setting the stage for early adoption of those that are most promising. Before discussing some specific obstacles facing certain technologies (nuclear power, capture and storage of carbon from fossil fuel generators, and renewable technologies) in Chapter 5, the committee turns in Chapter 4 to the potential environmental benefits of expansion of energy-efficiency measures.