Setting Priorities in Energy Innovation Policy: Lessons for the UK

Summary

The transition towards more sustainable, low carbon societies will require the development and deployment of a range of new and existing energy technologies. These include centralised supply side options such as carbon capture and storage, infrastructure technologies such as decentralised energy networks, and technologies adopted by consumers such as LED lighting, cleaner vehicles and micro-generation.

This paper analyses the role of governments in supporting this process and draws on experience from Europe, the USA and Japan. The paper's starting point is the common assertion that governments should avoid providing targeted support to particular technologies. Instead, they should set general frameworks to encourage more sustainable innovation, for example by creating carbon markets. The practice of 'picking winners' should therefore be avoided because governments are not best placed to decide which technologies to fund.

The paper challenges this argument on a number of grounds. First, the resources that governments can devote to sustainable energy innovation are limited. If there is no attempt to prioritise how these resources are used, there is a risk that they will be spread too thinly. Second, the urgency of climate change means that innovation and deployment may be too slow if there is an excessive reliance on the carbon market. Carbon markets such as the EU emissions trading scheme are in their infancy, and have yet to demonstrate that they are strong enough to promote significant low carbon innovation. Third, even if there were a high carbon price, it is unlikely that this would be sufficient to develop those technologies that are not already close to commercial status. Generic policy incentives such as carbon prices tend to favour near market technologies.

Having discussed the rationales for more specific government support for sustainable energy technologies, the paper explores some of the criteria that could be used by policy makers to prioritise this support. These include the costs and risks of different technologies; the different development stage of each technology, diversity within portfolios of technologies; and the role of industrial policy. Whilst many of these criteria are included within policy development processes, the paper argues that it is often hard to find an overall rationale for the priorities that emerge.

The paper concludes with five key implications for energy innovation policy. These are particularly aimed at UK policy, but are also relevant to other countries too:

- First, government funding for more sustainable energy technologies needs to increased and rebalanced. Rebalancing would give a greater support to technologies facing the 'valley of death' between demonstration and commercial deployment. In the absence of public funding, taking innovations across this valley of death can be too costly (and hence too risky) for many firms. UK policy is now moving in the right direction, though more needs to be done to align the size and profile of budgets with claims to international leadership on climate change.

- Second, government funding needs to be more technology-specific. Generic incentives such as carbon emissions trading schemes are necessary, but are not sufficient to develop and deploy the range of technologies required. Research shows that technology-specific approaches work. However, in order to pursue these successfully, policy makers will need enough independence to decide when to discontinue support - often in the face of disappointed lobbies.

- Third, the process of deciding which technologies to prioritise needs to be more transparent. Whilst the UK government has published a range of documents that focus on specific areas such as renewables and energy efficiency, there is no visible, overarching strategy. Such a strategy should establish what criteria are important for decision making - and how these criteria have been used to inform the development of policies and incentives.

- Fourth, policy needs to strengthen its capacity for evaluation of technology support programmes. In common with other governments, the UK policy system conducts some evaluations. However, this process does not appear to be a systematic one. Evaluation is critical so that failures do not threaten government legitimacy, but are seen as opportunities to learn.

- Finally, innovation policies need to deal with the locked in-nature of current energy systems. Whilst energy infrastructures, institutions and policies were developed to meet important social goals, radical change is likely to be required to tackle climate change effectively. Government policy therefore needs to open up energy systems to more radical technologies and business models, and ensure that institutions and common infrastructures facilitate their deployment.