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

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


1
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

2
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

3
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

4
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.

5
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.

6
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.

7
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

8
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, -------

9
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

10
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.

11
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

12
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

13
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

14
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

15
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

16
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

17
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.

18
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?

19
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

20
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
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