7

Thinking Globally

Clean energy innovation entails both competition and cooperation with other countries. U.S. policy must balance these twin imperatives across diverse technologies and sectors as well as in basic research and discovery science. Integrating these difficult issues, the seventh workshop session focused on clean energy innovation from an international perspective. David M. Hart, George Mason University, moderated the session. Framing remarks from Laura Diaz Anadon, University of Cambridge, covered global energy innovation and manufacturing trends and the landscape of push and pull policies. Willy C. Shih, Harvard Business School, described the significance of user pull in the success of new technologies, and provided contrasting examples of how the United States may harness it. John Melo, Amyris, spoke about supply chain considerations and designing sustainable products with the customer in mind. Varun Sivaram, Columbia University, presented specific recommendations for U.S. foreign policy to boost competitiveness in the global clean energy marketplace.

LAURA DIAZ ANADON

Professor of Climate Change Policy, University of Cambridge

Diaz Anadon began by briefly reviewing historical improvements in clean energy technologies. Within the past decade, solar photovoltaic (PV) modules, wind turbines, lithium-ion batteries, and LED packages have seen very substantial cost reductions. These improvements are partly

explained by technology push and government policies across the world that incentivized user pull.

On the technology push side, Diaz Anadon described the peaks and valleys of public energy research, development, and demonstration (RD&D) investments in International Energy Agency (IEA) member countries over the past five decades. Currently, total investment of 30 IEA countries and China is about $23 billion. However, as a share of gross domestic product (GDP), energy RD&D investment has halved since the late-1970s. The portfolio of energy technology investments is also changing, with greater focus on efficiency, renewable energy, and crosscutting research and less investment in nuclear. Diaz Anadon pointed out that some countries are ramping up investments rapidly. She highlighted the significant increase in China’s public RD&D contributions since 2014. China now spends twice the amount of the United States in terms of GDP. While absolute investments in the United States are about 7 times greater than in the United Kingdom (UK), their investments as a share of GDP are similar, and in recent years U.S. investments have increased gradually, while the UK’s have sharply increased.

The global user pull policy landscape in energy is characterized by policies that have brought down technology costs, said Diaz Anadon. A large and increasing number of countries are utilizing financial and fiscal incentives, feed-in tariffs or auctions for renewable power, and national carbon pricing policies. One area in which national market pull policies are lagging is heating and cooling. Diaz Anadon stated that recent political science literature has revealed insights into the interaction between energy innovation policy and politics. First, research has shown that co-benefits shape public opinion. Emphasizing the manufacturing, health, and competitiveness co-benefits of novel energy technologies can increase support, as long as the possible short-term distributional costs are addressed. Second, new industries create new “winners” and subsequently new interest groups supporting sustained work. Thus, a virtuous cycle is created in which increased clean energy technologies lead to increased support for clean energy technologies, although it is important to ensure that future technologies are not locked out.

Diaz Anadon transitioned to discuss trends in wind and solar manufacturing in China and India, because they serve to inform the global prospects for economic co-benefits from energy innovation. National support for wind in China began in the mid-1980s and has since intensified drastically. Domestic policies supporting solar specifically emerged more recently, after 2007, after China already had a strong manufacturing capacity. In comparison to wind, the early expansion of solar manufacturing was faster, with less targeted policy intervention and more reliance on international resources. At present, 5 of the world’s top 10 wind turbine

manufacturers are Chinese, and the country is the world’s largest manufacturer of solar panels. India also started policies promoting wind in the mid-1980s, and began promoting solar more recently. However, in spite of decades of policy, India has few wind turbine exports. The impact of the recent Indian solar policies (in particular, local content requirements) on solar power cost increases has been significant, but the impact on innovation and competitiveness is difficult to determine at this time, said Diaz Anadon.

In closing, Diaz Anadon noted that domestic push and pull policies have historically been the main drivers for clean energy innovation. Recently, policy makers in the international sphere are increasingly paying attention to energy and energy innovation. The majority of bilateral agreements are now focused on energy—Diaz Anadon underscored the Paris Agreement, Mission Innovation Pledge, Breakthrough Energy Coalition, and Green Climate Fund. Thinking about the role of international cooperation, Diaz Anadon emphasized the importance of setting clear goals and priorities, reducing transaction costs through sectoral rules and standards, reducing costs and risks through shared demonstrations, and building capacity through incentives.

WILLY C. SHIH

Robert and Jane Cizik Professor of Management Practice in Business Administration, Harvard Business School

Most prescriptions for improving U.S. technological position or competitiveness focus on the supply-side incentives, opened Shih. These include research and development (R&D) programs, workforce preparation, tax benefits, infrastructure support, and direct and indirect subsidies. However, not enough attention is given to demand-side incentives.

To illustrate the value of market pull, Shih drew from his study of the Chinese motorcycle industry. In the 1980s, small household shops started making “standard” parts that were copies of Honda, Yamaha, or Suzuki motorcycle components. The bikes were significantly cheaper than authentic imported Japanese bikes at the time, leading to increased demand. High demand drove down the learning curve and subsequently costs. The customer base provided the industry with the cash flow to scale, learn, and improve into a significant global presence today.

A similar dynamic occurs in today’s global marketplace, Shih explained. High-cost, integrated producers in the United States exist alongside low-cost producers motivated by commercial opportunity in China, for example. As illustrated by the Chinese motorcycle industry’s success, the low-cost producer has more opportunity for “learning-by-doing” to

drive component costs down. Thus evolves a tension in the United States: Cheaper imported components can increase competitiveness of U.S. products but can also lead to the crowding out of new technologies, strategic dependencies, and supply chain fragility.

Shih offered a notable contrast to developing technologies rooted in a problem-oriented approach. In the 1970s, NASA began to focus on improving the energy efficiency of aircraft engines. To accomplish this, it became both a customer and funder for technological innovations at General Electric (GE) and other aerospace companies. NASA funded the development of a demonstration prototype, and the cash flow allowed GE to perfect new technology and processes as it strove to accomplish clearly defined goals. A similar approach was employed with SpaceX. In both cases, a mission-oriented approach enabled well-functioning technocratic leadership to create a logical sequence of steps needed to achieve a mission. Shih suggested that this model be applied to future challenges such as grid modernization (Figure 7.1). Attention to the demand side, through a programmatic, goal-setting lens, can help the nation successfully meet its clean energy innovation objectives, he summarized.

JOHN MELO

Director, President, Chief Executive Officer, Amyris

Melo explained that Amyris is a synthetic biology pioneer that genetically engineers microbes capable of producing high-value carbon for different industries around the world. He described the complexity of scaling new, disruptive technologies to penetrate markets. It took oil 30 years to become a mainstream product until the oil industry found an application for it as motor fuel. New innovations likely will not take quite that long to reach scale, but it speaks to the timeline that emerging technologies face, Melo said.

At Amyris, carbon from plants is converted to useful products through fermentation, Melo explained. Therefore, the role of feedstock is critical. When considering feedstock, the regulatory and legal frameworks in a local market become critical. These frameworks must allow access to the feedstock at a transparent pricing mechanism, enabling predictable long-term economics and the ability to attract financing. Amyris utilizes Brazilian sugarcane in part because of these factors. Brazil has a long history of using sugarcane to supply much of the world’s sugar, and also as one of the largest markets for ethanol. As a result, Brazil has a very structured mechanism to ensure the stability of the value chain, from the farmer to the consumer. Thus, an extremely sustainable system is created that combines both market push and user pull principles.

Creating demand, said Melo, is often more challenging than developing the technology. Industries are entrenched and consumers are not willing to pay more for sustainable products. Consequently, the most effective way to drive demand for low-carbon solutions is to make them no-compromise, he observed. To encourage adoption, technologies or products must be lower cost and better performing. It is the responsibility of industry to deliver high-quality products, but governments can help with the economics, concluded Melo.

VARUN SIVARAM

Visiting Senior Fellow at the Center on Global Energy Policy, Columbia University

U.S. leadership on global energy innovation is critical not only to advance efforts on climate but also to enable the nation to compete internationally, began Sivaram. The United States has missed out on some early clean technology opportunities—China dominates solar, wind, and batteries—but opportunities remain to capture market share in rapidly

growing markets that are nascent today but could account for trillions of dollars in value by midcentury.

The United States has comparative advantages in many emerging markets, including carbon capture and storage, digital technology, advanced transportation, and biofuels. The United States still spends the largest amount on RD&D of any country in the world in absolute terms (although there is a chance that China has already surpassed U.S. spending—reliable data are scarce). Given these opportunities, Sivaram offered five recommendations for U.S. foreign policy.

First, Sivaram stated that the United States should elevate energy innovation to the highest level of its international energy and climate diplomacy. The nation must reassert its leadership and cooperation in institutions such as the Clean Energy Ministerial and Mission Innovation. In addition to quantitative targets, the next generation of these organizations should include sector-specific roadmaps to solve clearly defined challenges, such as combating technology lock-in. Also, it is critical to involve the private sector in what is now largely collaboration among governments. In a new volume, Energizing America, Sivaram and coauthors lay out a detailed roadmap for the U.S. federal government to boost domestic energy innovation funding to $25 billion by 2025.¹

The second recommendation Sivaram suggested is to boost U.S. bilateral collaboration, especially with trusted partners such as the UK, Canada, Japan, the European Union (EU), South Korea, and India. He noted that the United States is better positioned to lead on innovation-driven competition as opposed to commodity-driven competition.

The third recommendation is to spearhead cooperation on international standards, said Sivaram. Standards can coordinate firms to develop products with large market sizes and benefit U.S. exporters. For example, the United States should intensify its efforts to lead the development of technical standards for smart grid products and services; China is already aggressively seeking to set such standards.

Fourth, Sivaram recommended that the United States coordinate domestic innovation with its foreign policy strategy. For example, the country should tailor its export finance priorities to domestic innovation priorities, and, similarly, it should tailor its international standard-setting work to priority technology areas.

Fifth and last, the United States should integrate its clean energy technology priorities into its trade agenda, recommended Sivaram. He urged the nation to come to an understanding with the international

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¹ V. Sivaram, C. Cunliff, D. Hart, J. Friedmann, and D. Sandalow, 2020, Energizing America: A Roadmap to Launch a National Energy Innovation Mission (New York: Columbia University), https://www.energypolicy.columbia.edu/energizing-america.

community on acceptable subsidies and supply-side supports for industries.

DISCUSSION

Following the speakers’ remarks, Hart moderated a discussion session that covered balancing global cooperation with competition, the role of multinational enterprises, the effect of COVID-19 on supply chains and R&D, and opportunities for international collaborations.

Cooperation and Competition

Asked about the balance of cooperation and competition in the U.S-China relationship, Diaz Anadon acknowledged that both nations are trying to capture clean technology markets. However, she called attention to productive ways to engage that benefit both nations such as collaborating on goals, targets, and international standards. Shih added that the global collaboration on the COVID-19 vaccine demonstrates the universal benefit of working with China. He also pointed out the deep interdependence between the United States and China in many other areas, particularly the supply chain for basic components, and stressed the importance of maintaining a productive dialogue.

Sivaram agreed that there are important priorities that can be solved only through dialogue with China—for example, reducing China’s export finance of fossil-intensive infrastructure through the Belt and Road Initiative. He also recognized it is in the best interest of the United States to develop robust industrial strategies to compete in clean energy technology markets.

Melo remarked on how fast the Chinese consumer has accepted sustainability. On the demand side, the consumer and the government are aligned on a long-term strategy to transition to a lower-carbon economy. Perhaps the United States can learn from this dynamic, he suggested.

Hart asked Diaz Anadon how she sees the U.S. relationship with the UK and the EU evolving. Diaz Anadon said that she has observed a breakdown in trust between the nations. However, she was optimistic that the UK and other European governments would be open to rebuilding that relationship if the United States expressed a genuine willingness to engage.

Multinational Enterprises

Hart asked about the role of multinational enterprises. Melo responded that behavior of nationally owned oil companies depends on their location

and the incentives in place there. Some companies are solely focused on extracting hydrocarbons, while others are redeploying profits to transition to cleaner industries. In the middle exist countries whose stability depends on oil and who must rebase their economies. Diaz Anadon added that while many multinational corporations are making plans to transition to cleaner products and processes, research indicates that voluntary actions may not be sufficient to promote emissions reductions and that there is still a need to shape and, in some cases, create markets. Governments are essential in establishing the direction of travel, goals, and the necessary user pull in the form of incentives and regulations.

COVID-19, Supply Chains, and Regionalization

The COVID-19 crisis has drawn attention to supply chain resilience and fragility. Asked about the evolution of supply chains in the coming years, Shih expressed skepticism about the push for regionalization. The higher costs associated with regionalization are not fully understood by some advocates, said Shih. Higher costs will make competition more difficult in many areas, particularly with China on solar and LEDs.

Sivaram asked Shih whether it would be beneficial to localize some supply chains. He referenced the virtuous cycle of learning and development associated with collocating manufacturing and R&D. Shih replied that the way to reap those benefits and also address higher costs associated with regionalization is to invest in process innovations. Diaz Anadon expanded that in addition to investing in process innovations, the United States could also try to gain an advantage by specializing in the manufacture of components of complex technology, rather than the entire supply chain.

Melo added that Amyris has adopted a renewed focus on resilience resulting from the COVID-19 crisis. He described deploying smaller-scale backup factories in response to evolving risks around the movement of products and people.

Sivaram warned that increased cost pressures might lead companies and governments to cut R&D funding, resulting in long-term detriments for competitiveness and climate. In India, this could be more prominent.

In Europe, Diaz Anadon described clean energy as a core focus of recovery efforts. Many European countries are demonstrating a willingness not just to create ambitious legally binding targets (like the UK), but also to put enabling policies in place and make infrastructure investments.

International Collaborations

During the Obama administration, Mission Innovation was rolled out—member countries pledged to seek to double their public investment

in clean energy innovation over 5 years. Hart asked whether the United States should take part in global challenges such as these. Sivaram expressed his belief that the United States and DOE should invest in international collaboration. He offered one approach in which the United States and the EU release a coordinated funding call and research teams work together. In this type of scenario, the United States funds international collaboration, but money goes toward U.S. researchers and firms. These types of collaborations can result in technological advances that are more rapid than if the United States funded its own researchers in isolation instead of in coordination with other governments, he said.

Sivaram stated that international partners should not be limited to developed countries. For example, India is a notable geopolitical and technological partner in clean energy markets. Melo expanded that integrating local talent into solutions is extremely valuable. Amyris established fermenting and processing centers in Brazil, deploying local scientists to scale its technologies in local markets.