The Power of Change Innovation for Development and Deployment of Increasingly Clean Electric Power Technologies (2016) / Chapter Skim
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3 Supporting and Strengthening the Energy Innovation Process to Expand the Technological Base for Increasingly Clean Electric Power
3 Supporting and Strengthening the Energy Innovation Process to Expand the Technological Base for Increasingly Clean Electric Power
Pages 49-86
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From page 49... ...
. 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.
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. STAGES OF THE ENERGY INNOVATION PROCESS 1 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.
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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.
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52 FIGURE 3-1 Stages of the energy innovation process. SOURCE: Adapted from Lester and Hart, 2012, Figure 2.1, p.33.
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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.
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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
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FIGURE 3-2 Stages of the innovation process and valleys of death. SOURCE: Adapted from Lester and Hart, 2012, Figure 2.1, p.33.
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56 FIGURE 3-3 Stages of the innovation process and key obstacles to acceleration. SOURCE: Adapted from Lester and Hart, 2012, Figure 2.1, p.33.
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Finding 3-1: Market failures and nonmarket barriers for increasingly clean power technologies exist at all stages of the innovation process. STRATEGIES FOR OVERCOMING THE OBSTACLES TO ACCELERATED INNOVATION Some possible strategies for overcoming the obstacles at each stage of the innovation process are shown in Figure 3-4.
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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)
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. 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)
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• 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.
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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.
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, 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.
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From page 63... ...
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 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.
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. 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.
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. 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)
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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 deploymentrelated prizes (targeted deployment prizes, advance market commitments, cost/pricing conditions, or intellectual property rights buyouts)
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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.
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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.
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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.
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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)
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• 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)
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, 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.
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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.
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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)
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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.
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. 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.
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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.
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Regional Innovation Demonstration Funds (RIDFs) The financing of energy technology demonstration and early postdemonstration projects is challenging.
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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.
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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.
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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.
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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.
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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.
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New policies are needed to incorporate best practices for siting and streamlined review and permitting processes. While this issue applies broadly to the deployment of all increasingly clean energy technologies, DOE's SunShot Initiative, discussed earlier in this chapter, may offer a model for addressing these challenges.
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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.
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