Tranforming the Energy Economy: Options for Accelerating the Commercialization of Advanced Energy Technologies—Framing Statement

Executive Session Held at Harvard Kennedy School , December 1–2, 2010

Note

The following framing statement was prepared by Harvard Kennedy School’s Laura Diaz Anadon, Erik Mielke, Henry Lee, Matthew Bunn, and Venkatesh Narayanamurti ahead of the workshop with contributions from Booz Allen Hamilton's Gary Rahl and Richard Goffi in four of the case studies.

EXECUTIVE SUMMARY

Introduction to the Workshop
On December 1 and 2, a select group of senior representatives from government, industry, finance, and academia will convene at the Harvard Kennedy School for an off-the-record workshop on what the U.S. government could and should do to accelerate the commercialization of advanced energy technologies.

The purpose of this framing paper is to provide background information on the topic, establish a common framework, and ultimately stimulate discussion at the workshop. The report format is consistent with the workshop agenda: a discussion of the challenge, followed by a framework for designing policy options, and illustrative case studies.

The Need to Transform the Energy System
There is broad political consensus that the current energy system in the United States is unable to meet the nation’s future energy needs, from the security, environment, and economic perspectives. New energy technologies are required to increase the availability of domestic energy supplies, to reduce the negative environmental impacts of our energy system, to improve the reliability of current energy infrastructure (e.g., smart grid, energy storage), and to increase energy efficiency throughout the economy.

Rapid transformation of the energy system would require wide-scale introduction and adoption of new, advanced energy technologies. Several factors make the introduction of new energy technologies inherently more difficult than in other sectors. These factors, some of which are listed below, have fostered a very conservative approach to investment in technology innovation, providing a challenging backdrop for rapid transformation.

• High capital cost and slow asset turnover give incumbent technologies an advantage
• Commoditized product leaves limited scope for differentiation other than cost
• The regulatory premium on reliability favors incumbent technologies, and the regulatory environment limits the upside from innovation

The Demonstration Challenge
If adequately incentivized, the private sector is usually able to take on the risk and financial burden of deploying new technologies. But before deployment can be realized, new technologies need to be demonstrated at near-commercial scale and in operating conditions closely approximating the commercial environment in which the technology would be deployed.

There are several barriers to private sector investment in demonstration projects, and they vary by technology and energy sub-sector. This framing report explores these barriers in greater detail, including seven mini-case studies, ranging from nuclear power, CCS, and biofuels to solar PV and smart-grid technology. These barriers can be summarized into three main categories:

• Access to capital for large-scale projects
• Technology risk
• Policy, regulatory and market uncertainties

Does the absence of private sector investment automatically mean that there is a sound public, as well as economic, policy argument for government intervention? There is general agreement that with the current regulatory environment, technologies such as CCS will not be demonstrated and commercialized without government support, but there is less agreement about whether the government has a role to play in supporting the large-scale manufacturing of new energy technologies, e.g., solar PV manufacturing.

Some reasons that have been articulated that may justify an increased government role in supporting the demonstration of energy technologies include:

• Without government support, many advanced technologies needed to reduce the environmental impacts of the energy sector may not be tested at a commercial scale as quickly as we need them to be.
• Enabling the demonstration of some technologies may be desirable to increase U.S. energy security and economic competitiveness.
• Having access to and knowledge about a wide array of new technology options could have long-term value to the U.S. economy and society as a whole, particularly as new circumstances arise that are difficult to predict today. This option value may not be adequately understood or captured by the private sector alone.
• Some technologies developed and demonstrated in other countries may not be appropriate for deployment in the United States, e.g., for regulatory reasons.

Options for Accelerating Commercialization
It is clear that the government cannot, and should not, support demonstration of all technologies. The heterogeneity of various energy technologies, and the energy industry itself, means that there is no one-size-fits-all or "silver bullet" solution. A framework to support energy technology demonstration projects should consider the following:

• Choosing Projects. What criteria should be used to decide which projects to support?
• Institutional Design. Should policy implementation rest within existing Department of Energy (DOE) agencies or would it be better to create new institutions. e.g., the Clean Energy Deployment Administration (CEDA)?
• Appropriate Mechanisms. Which of the current mechanisms work and should be expanded and/or improved? Are there any other options that should be considered?

Workshop Objectives
The lack of consensus on the appropriate course of action for the government partly reflects established technology biases (e.g., coal vs. nuclear vs. wind), as well as different perceptions of the role to be played by the government vis-à-vis the private sector in the general economy. A similar diversity of views is likely to be present at the workshop. The event is not intended, however, to resolve all questions.

Instead, by bringing together some of the most engaged individuals from the governmental, industrial, financial, and academic sectors, we hope that we will be able to identify: (1) areas where there may be a degree of agreement regarding the case for government intervention; (2) some of the appropriate tools that the government could use and mechanisms for the government to take action; and (3) areas where research or future workshops may be helpful to determine the best policy options.