Unlocking Energy Innovation

30 January 2013

In a recent book, Unlocking Energy Innovation: How America can Build a Low-cost, Low-carbon Energy System, Richard Lester and David Hart [professor of public policy at George Mason University] put forward a step-by-step plan to move the US energy system away from its heavy (more than 85%) dependence on fossil fuels.

They believe that without fundamental changes to the way that energy innovation is organized and financed, especially in the electric power sector, the U.S. will not succeed in achieving a secure and sustainable low-carbon energy future.

"The biggest obstacle to this transformation is that most low-carbon energy technologies available today cannot do the job. They are either too expensive or too difficult to scale, or they have detrimental economic or environmental features," the authors state, adding that the development of other options have been impeded by organizational, institutional or regulatory challenges.

The 167-page book maps three waves of energy innovation spanning the rest of the 21st century. But despite the long time frame, efforts to accelerate each wave must start now, the authors argue.

"Because change in the energy sector only happens relatively gradually, actions that will affect energy outcomes decades from now must be decided on soon," Lester told NEI, estimating that will take around 50 years to achieve a major shift away from the current energy infrastructure, even if we start right away.

Unlocking Energy Innovation explains how the three waves of energy innovation might pan out. The first wave, ramping up in the coming decade, targets improvements in energy efficiency, especially in buildings, and focuses on innovations in business models. The second wave, beginning in about 2020 and continuing through mid-century, foresees the deployment of low-carbon generating technologies -- nuclear, wind, solar, geothermal -- on a very large scale, while driving down costs through innovation. This phase is covered in most detail, taking up two chapters of the book. The third wave of low-carbon innovations is more speculative; it might draw on breakthroughs in nuclear technologies including fusion, carbon-neutral biofuels, and advanced solar. These technologies, and others yet to be invented, cannot be expected to contribute on a large scale until the second half of this century.

Towards the end of the book, the authors put forward a ten-point framework for strengthening the U.S. energy innovation system. This scheme calls for policies to create more space for new entrants into the energy sector, expanded competition in electric power markets, a new financing mechanism to accelerate the 'downstream' stages of the innovation process, as well as heavier investment in 'front-end' research and development.

Lester explained to NEI how the new financial structure could work:
"We proposed the idea that the way to generate financing for these kinds of large demonstration and post-demonstration projects would be through an electricity user fee. We came up with a structure that was designed to allocate the revenues in a competitive way, and also to take advantage of the fact that in the US there are multiple regional economies where there are quite different views of what is an attractive energy technology.

The idea here is to create a set of financing mechanisms that are well-suited to the high risk and large scale of energy technology demonstration and early adoption projects, but to do so in a way that wouldn't centralize all the decision-making within the U.S. Congress and federal agencies like the Department of Energy. Rather, these decisions would be made by regional boards -- almost like regional investment banks -- that would be funded by revenue streams from electricity user fees collected at the state level. The revenue collectors, which in our scheme would be state trustee organizations (a bit like the way state pension funds are invested today), would allocate the funds to the regional investment boards that had the most interesting and worthwhile project portfolios.

Each year the revenues from the electricity user fees would have to be fully allocated to innovative low-carbon energy projects, but the boards would have to compete for the funds from the state trustees. Low-carbon energy innovators - for example, project developers seeking to demonstrate new nuclear or carbon capture technologies - would similarly have to compete for funding, but would have the ability to go to any one of these regional boards with their projects. So it's a system that would be much more decentralized. It would be a more competitive and more open structure, in particular more open to new entrants, which we know is what's needed for an effective innovation system. And it would be funded more predictably and on scale far larger than could be achieved through the federal budget appropriations process, especially given the fiscal constraints the U.S. is now facing."

Another key need is for continued investment in energy research and development.
Lester told NEI: "The United States is seriously under-investing in R&D at the federal level. Especially when it comes to fundamental research, this must continue to be a federal responsibility. Groups who have looked at this issue, ranging from PCAST [the President's council of advisors on science and technology] to a private group led by Bill Gates [the American Energy Innovation Council], and others, have all concluded that we are under-investing in energy R&D by a factor of perhaps three of four. I wouldn't disagree with that and I think perhaps we have to do even more. This is true in nuclear and also other areas of energy technology."

Dr. Richard Lester spoke to NEI assistant editor Caroline Peachey at SimWorld 2012 in Dubai, UAE. The trip was paid for by GSE Systems.

Unlocking Energy Innovation Unlocking Energy Innovation

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