Driving Innovation Through Renewable Policy

In the past few days, there have been a number of articles exploring a similar theme – the importance of U.S. government policy in driving renewable energy investment. Each article is worth a quick review, because each touches on key aspects of renewable deployment, and addresses at least one core component of a strong renewables policy:

 Energy Outlook

…Instead of becoming progressively less dependent on help from the government, many [renewable] firms are even more reliant on aid as a result of the financial crisis…This might be necessary for the moment, but it undermines long-term competitiveness.

…There's a strong argument that some level of government support is necessary to help renewable energy compete with traditional energy sources that operate in a market that doesn't account for significant externalities such as environmental and energy-security effects….Yet we now see government not only helping to level the playing field by means of renewable energy tax credits for investment or production and mandates requiring a set percentage of energy to come from renewable sources, but also playing the role of venture capitalist and banker.

…Our goal ought to be a renewable energy sector that can stand on its own

Cleantech Investing

…My point isn't to defend subsidies or biodiesel…my point is that if you're a lawmaker and you decide you DO want to incent the growth of an emerging industry by providing tax credits, the very WORST thing you can do is to set the timeframes short and then fail to re-up them in time.

…So when someone wants to build a biodiesel plant, or a wind farm, etc., and they approach project financiers, a volatile incentive system is EXACTLY OPPOSITE of what you want if you want to encourage broad roll-out of a technology.  And yet in the U.S., Congress insists upon not only relatively short-term incentives that need to be renewed or else lapse, then they regularly fail to meet the deadlines for renewal!

WSJ: (subs)

…even fans of renewable energy worry this public largesse is costing too much. They say renewable energy deserves subsidies to help it mature to the point where it can compete against fossil fuel. But they are concerned that society, in its haste to roll out wind turbines, solar panels and other forms of clean power, is spending billions of dollars without spurring as much renewable energy as it could.

…Virtually all energy is subsidized. Fossil fuels, which provide about 80% of total global energy, have enjoyed favorable tax breaks and other incentives for decades. The International Energy Agency estimates that fossil-fuel subsidies in developing countries -- government money to reduce the price of energy -- totaled $310 billion in 2007.

…In Germany, renewable energy from projects that qualified for feed-in tariffs between 2004 and 2008 will cost consumers [euro]122.3 billion (about $175 billion) between 2008 and 2030 -- 46% more than the same amount conventional energy would cost, New Energy Finance predicts.

NYT (Friedman)

…We are either going to put in place a price on carbon and the right regulatory incentives to ensure that America is China’s main competitor/partner in the E.T. [Energy Technology] revolution, or we are going to gradually cede this industry to Beijing and the good jobs and energy security that would go with it.

…even Chinese experts will tell you that it will all happen faster and more effectively if China and America work together — with the U.S. specializing in energy research and innovation, at which China is still weak, as well as in venture investing and servicing of new clean technologies, and with China specializing in mass production.


Taken together, these four articles elucidate several criteria of successful and sustainable clean energy policy including:

  • Driving innovation and cost reductions within existing technologies
  • Phasing down support for technologies as they mature, to lead to commercially competitive industries
  • Providing certainty for investors and industry (manufacturers, developers, etc.) through clear and stable support mechanisms
  • Avoiding inefficient subsidies that provide windfall profits to firms and investors while minimizing overall program costs for current rate-payers and future generations

My colleagues and I have spent a fair amount of time developing potential renewable deployment (and innovation) mechanisms and would agree with all of the principles above.

However, there is an important corollary that should also feature prominently in this discussion – the need to encourage continuous innovation across a dynamic portfolio of technologies, i.e. addressing research, demonstration and scale-up of very early stage new technologies.  

A primary goal of good renewable energy policy should be to do more than just provide sufficient and stable funding to encourage the rapid and large-scale deployment of existing clean technologies (although this is vital).  At the same time, policy should also drive the emergence of the next generation of technologies (be they twists on existing ideas or brand new unproven concepts) and ensure that enough funding (and political capital) remains for their deployment 5-10 years from now.   

Developing policy mechanisms that spur emerging new technologies is difficult.  Increases in targeted RD&D funding certainly feature in the conversation, as do demonstration cost-sharing grants and loan or performance guarantees that help projects overcome the proverbial valley of death.  In general, the goal is to utilize mechanisms that work most effectively within specific stages of deployment.

But one of the more difficult challenges that we face in policy is advocating for those next generation clean technologies that haven’t reached the market or don’t yet exist.  Outside of the advocacy of some VCs, and select large companies that have material interests, many of these new technologies are too under the radar to have seats at the table.  Given the existing challenges of developing successful policy for today's technology that meets the criteria described above, we should also make sure to leave enough room to capitalize on the innovation that will undoubtedly follow in the future.