A TECHNOLOGY SUPPLY SIDE APPROACH TO U.S. ENERGY POLICY

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A TECHNOLOGY SUPPLY SIDE APPROACH TO U.S. ENERGY
POLICY

• WILLIAM B. BONVILLIAN
• DIRECTOR, MIT WASHINGTON OFFICE
• DUKE UNIV.S NICHOLAS INSTITUTE
• SYMPOSIUM ON FEDERAL CLIMATE CHANGE LEGISLATION
• JULY 19, 2007

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My thanks to

• My Georgetown colleague, Distinguished Prof.
  Charles Weiss, with (whom I am working on an
  extended article on energy innovation, which
  includes many of the ideas presented here), and,
• My MIT colleague,
• Professor Richard Lester

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The ENVIRO/ GEOPOLITICAL Framework

• The environmental and geopolitical costs of
  Americas addiction to fossil fuels make a major
  federal program to stimulate innovation in energy
  technology justifiable and essential.
• Energy plays a central role in the U.S. economy
• Not a unified system - different technologies for
  transport, electrical power, etc. - many pieces
  to the puzzle
• wide range of technology needed - no silver
  bullet
• Program will need to approach the dimensions of a
  major military transformational effort
• It must go beyond research and development to
  include all aspects of the innovation process
• Should be technology neutral as far as possible,
  consistent with the need for measures to
  overcome obstacles specific to particular
  technologies

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Bifurcating Demand and Supply Side Energy Tech
Policies

• A technology supply-side program will need to be
  accompanied by demand-side policies that ensure a
  long-term, sustained increase in the price of
  carbon-based energy -a carbon tax or a
  cap-and-trade system - to foster technology
  demand.
• However, given the vested interests threatened by
  such measures, political support for sound
  demand-side policies in Congress and the
  executive branch appear some years away.
• The political barriers to a technology
  supply-side strategy are not as high.
• Given the depth of the need for new energy
  technology there is no reason to wait years for
  an accompanying demand-side strategy.
• Tech innovation requires an innovation system,
  not just technology demand - we will both need
  tech supply and tech demand policies
• The two approaches are both needed but do not
  have to commence in parallel, and progress could
  be made now on technology supply.

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Its Not the Manhattan Project

• Some have called for a Manhattan Project or
  Apollo moon mission for new energy technology
• But those famous technology development projects
  were focused on single technologies to be stood
  up in comparatively short-term multi-year
  projects.
• The technologies launched then were for a single
  customer with the deepest pockets, for the
  government sector -
• Not for deeply imbedded, stratified and highly
  competitive private sector markets.
• They were simple compared to the energy
  technology challenge.
• Energy challenge requires a very different
  development model in which a complex mix of
  energy technologies must evolve over decades into
  the private sector.
• Toughest tech challenge U.S. has faced.

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Multiple Dimensions

• Will need many strands of technology development
  in multiple time dimensions there cannot be a
  single technology focus.
• The technology development system we create will
  need to consider and retain room for evolving
  advances over time
• there will be next generation batteries and solar
  and then there will be third and fourth
  generation advances that will displace the first
  and second generations.
• So there must be space for promoting both
  incremental advance and disruptive new
  technologies
• technology arterial sclerosis must be avoided.
• we have a complex systems problem
• there will be multiple energy technology pathways
  that must evolve over time, and each launch path
  will be different, although many will have to be
  complementary.

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Characterizing Energy Tech Pathways

• SO each new energy technology will follow a
  different path, operating in different energy
  markets, and facing different cost pressures and
  timescales for advance.
• The design of policy instruments for a particular
  technology will be determined by the likely
  launch path of innovations based on that
  technology.
• Over the past half century, the most difficult
  step in a technological revolution has been to
  bridge the Valley of Death between research and
  innovation.
• The government has played a major role in this
  bridge building
• On the innovation front end by support for
  RD, and
• On the back end by supporting technology
  prototyping and initial market creation,
• Bridging was largely though govts pervasive
  role in the defense technology sector, esp. in IT
  - DOD dominated six major 20th century Technology
  Waves - Energy will be similar

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Energy Tech Launch Categories

• Launch categories for new energy innovations
• 1. Experimental technologies requiring long-term
  research. These require research support on the
  front end of the innovation pipeline but do not
  require immediate back-end financial incentives
  or regulatory policy support for prototyping or
  initial production stages to promote deployment.
  
• Exs - Fusion, Hydrogen Fuel Cells
• 2. Disruptive innovations that can be launched in
  niche markets where they are competitive, and
  achieve gradual scale-up building from this base.
  The launch of these technologies would be
  assisted by support to front-end research and
  development back-end policies (financial
  incentives, regulatory renewal portfolio
  standards) plus higher carbon prices on the
  demand side would help but would not be
  mandatory.
• Solar PVs and wind for off grid power, -------

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Tech Launch Categories, cont

• 3. Component innovations - non-confrontational
  launch these would be secondary innovations,
  that are components in larger systems and face
  immediate market competition based on price, but
  are acceptedable to the system mfg. These will
  require both front-end support to research and
  development and back end financial incentives,
  subsidies or regulatory policies to facilitate
  their introduction and scale-up as soon as they
  are close to being competitive.
• Exs - Batteries for Plug-in Hybrids, Enhanced
  Geothermal
• 4. Component innovations - confrontational
  launch these would be secondary, component
  innovations having inherent cost disadvantages
  and facing significant competitive or political
  opposition. These, too, will require both
  front-end and back-end support, including major
  subsidies or policy mandates if they are to enter
  the marketplace at all.
• Exs-Carbon Capture Sequestration, Biofuels
  Nuclear Power

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Tech Launch Categories, cont

• Two categories cut across most of the prior tech
  launch categories
• 5. Incremental advances in conservation and
  end-use efficiency. These will require both
  front-end and back-end support and will require
  increases in demand-side carbon prices to
  stimulate their adoption.
• Exs - improved IC engines, Building
  Technologies, Appliance Standards
• 6. Advances in manufacturing technology and
  support for manufacturing scale-up for all types
  of energy technology. Investments in these
  categories will be required to drive down
  production costs and enable scale up in most new
  energy technology areas.

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Gaps in the Energy Innovation Institutional
System

• Technology supply will not just materialize and a
  demand-side approach is not enough the energy
  innovation system will need improvements to
  respond to demand
• Improving energy technology supply will boost
  the possibility of demand policies by
  demonstrating the availability of technology
  solutions
• Energy RD has been in decline in public and
  private sectors since 1980 - down about half in
  real dollars in both sectors

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The Existing Energy Innovation Players

• Energy transitions tend to be very gradual -
• the transition from wood to coal is still very
  recent history
• At DOE
• Office of Science - fundamental research agency,
  not in tech transition area
• EERE - demonstration not building and
  transitioning breakthroughs
• Energy Labs - nuclear base not in tech
  transition sector
• Private sector
• Largely mature sector
• Established firms tend to resist radical
  innovation that disruptss their established
  business models - true in energy
• Major cost barriers to intro of new technology

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Innovation Institutional Gaps

• 1) The Translational RD Gap - ARPA-E
• Recommended by NAS Gathering Storm
• Bills in House and Senate
• The DARPA model for translational research -
• Right - Left identify challenge on the right
  side of the pipeline and then nurture the science
  breakthrough on the left side to get there
• Move from breakthrough to innovation
• Hybrid model blending outstanding univ.
  researchers with startups and smaller firms
• Small, flexible, flat, non-hierarchial,
  collaborative networks, turnover, risk-taking,
  great talent
• Island-Bridge model
• Issues competitors within DOE
• Need funding at a scale to make a difference

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The Institutional Gaps, cont

• 2) Federal Corporation for Engineering
  Demonstrations
• Technology deployment engineering demonstrations
  will be needed in a series of energy areas
• For ex., Carbon Sequestration looks like it will
  work but will require 3 to 5 major demonstrations
  in different geological areas, done to assure
  best operating practices and gain commercial
  efficiencies
• Govt Corp. is a way of insulating from
  Congressional interference
• Govt Corp. can help assure commercial
  involvement and projects that meet commercial
  standards

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The Institutional Gaps, cont

• 3) A Sematech for Manufacturing Process
  Efficiencies
• Most new energy technologies face major cost
  challenges compared to established technologies
• Cutting mfg. costs through process improvements
  and mfg. technologies is key to costs
• Model - Sematech focus on semiconductor mfg.
  technology to make SC sector cost competitive
  world-wide
• Many older models - machine-made interchangeable
  parts came from War Dept arsenal support in early
  19th century
• Lower per-unit production costs key to economies
  of scale for new energy technologies
• Effort could be managed through industry
  consortia around new energy sectors - like
  Sematech model

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The Institutional Gaps, cont

• 4) Financing for Production Scale-Up
• Many sectors will need capital assistance to
  enable the rapid production scale-up for advanced
  energy efficiencies
• Ex. in the auto sector, fleet turnover is 20
  years, and production scale up for new vehicles
  can add many years to that total. It takes years
  for new models based on existing auto technology
  to be launched - ex., Saturn
• Federal corp. for low cost financing of new mfg.
  processes and equipment for new energy
  technologies could induce more rapid product
  transition

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The Institutional Gaps, cont

• 5) Collaboration between Private and Public
  Sectors
• Industry Consortia with ties to govt will key to
  RD Front End as well as cooperation on the
  Back End
• 6) Common packages of Back End incentives
• We cant reinvent back end incentives for each
  new energy technology pathway, we will need
  common packages for groups of technologies
• This will help promote technology neutrality
• 7) The Roadmap
• A think-tank, with access to private, academic,
  and public sector expert leaders on energy
  technologies, to develop a detailed roadmap for
  the requirements for the development and launch
  of particular energy-related innovations and to
  recommend policies to facilitate them, on the
  innovation front and back-end. The roadmapping
  would be a process, with ongoing and periodic
  updating.

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Renewal of US Competitiveness Based on New
Energy?

• Energy is a Multi-Trillion Sector
• Major new investments will be flowing world-wide
  into new energy technology
• If the US sits this out and lets other lead, it
  will miss out on these economc opportunities
• And US innovation leadership is still so strong
  (last three half-century innovation waves led by
  the US) that it will be needed if we are to get
  to a 50 CO2 reduction by 2050
• On the other hand
• Will new energy create new functionality in the
  economy?
• Economic growth comes from technological and
  related innovation (Solow) that improves
  productivity, therefore translates into a real
  gain in societal wealth
• Can we play this out in energy as we did in IT?

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Energy Technology and Economic Functionality

• IT launched into a niche initally without
  competitive pressures front end and back end
  funded by the govt through DOD - transformed
  productivity, therefore raised societal wealth
• Energy will be different
• Energy wont change functionality
• - autos will still be autos even if they plug in,
  electricity will still come from wall plugs to
  appliances
• New energy wont necessarily lead to productivity
  gains - therefore it may not be the optimal
  economic growth investment
• Not like IT that created entirely new
  functionality in the society

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Energy and Economic Growth

• We will be diverting a significant portion of our
  economic wealth into energy, but without the
  corresponding functionality/productivity gain
• Unlike IT, an energy revolution will not
  necessarily pay for itself in the way IT created
  sectoral deflation and new productivity.
• So although new energy is a sector we have to be
  in, dont oversell what new energy will do for
  economic growth