Balancing deployment and innovation of low-carbon technologies

Low carbon technologies are expensive and without subsidies from the government, most of these technologies are not economically feasible. As these technologies are expensive, they do not have a very high demand for them at that high price. Because there is not much demand, it is difficult to deploy these technologies at a large scale and gain the advantage of economies of scale which further decrease the cost of production. Hence both making the technologies better and increasing the demand must be focused on, for these technologies to have a substantial impact. However, because financial resources are limited, the question is, how should they be allocated?

Low carbon technologies, being relatively new, have a huge potential for improvement. Improving these technologies requires funding into the research and development sector. As per Robert M., et al., innovation is proportional to the funding for research and development. From the data collected, they concluded that between 1976 and 1996, as the R&D funding increased from $100 to $200 billion the number of patents increased from 70,000 to 110,000 (1). Funding research and development enables firms to hire people to research a technology, develop it and launch it into the market. Without research and development, it is next to impossible to scale up a technology from laboratory scale to a larger scale. Research and development had a significant role in decreased the cost of solar from $8/W in 2007 to $4/W in 2013 (2). If it was not for federal funding in form of loan guarantees, companies like Tesla and First solar would not be able to deploy their technology at such a large scale. Without research and development, a technology will not be deployable. Moreover, subsidizing technologies which are expensive compared to conventional counter parts will make the economic system unsustainable in the long run (7). Hence research and development are important for technology development.

Having said that, innovation can bring down the cost of a technology only to some extent. Demand for the new technology and its adoption further bring down the cost as the technology starts benefiting from economies of scale. The Feed-In-Tariff (FIT) policy in Germany, which payed customers more than the retail electricity rates for excess electricity from solar, made the economics of solar look appealing. With FIT, Solar PV in Germany is profitable to the customer over its lifetime. In Hawaii, the high electricity prices, and 35% state tax credit on solar combined with a 30% federal tax credit brings down the payback period to about four to five years (3). With such strong economics, the demand for renewable technologies increases and the cost of producing them decreases as the scale of production becomes economical. Without funding on deployment, which reduces the cost and increases the economic value, there will be very little demand. Other reason why deployment helps, is that it addresses the urgency to fight climate change. Deployment of green energy technologies is very crucial to meet the ambitious emission reduction targets. Moreover, as per reports, “for every $1 of investment avoided before 2020 an additional $4.30 would be needed to spend after 2020 to compensate for increased emissions” (4). Funding for deployment then, is necessary for clean technologies to make economic sense and fight climate change.

However, doing either one of the two will certainly not aid us in achieving the goal of clean energy. Funding only innovation would imply that the technology is getting better, but it is taking for ever to be implemented on a scale which would have a significant impact on emissions. On the other hand, funding deployment would imply that the technology deployed is not as technically advance as it could have been, and it does not give much value to the investment in it. This situation is like asking for either eggs or chicken and getting one without the other is not possible. For example, Tesla Motors did not wait until they had a perfect electric car to sell it. They launched the Roadster and kept improving the technology. As people started buying more Tesla vehicles and the company’s revenue increased. After selling 125,000 cars since its inception, Tesla now has the technology and the economies to sell the Model 3 for almost a third of the price of the Roadster (5). On the contrary, although technologies like solar are being deployed on a large scale, they are still not able to compete against conventional technologies without subsidies. U.S. Secretary of Energy Ernest Moniz quotes, “Innovation brings continued cost reduction” (8). While funding innovation will help overcome the technological barriers like efficiency, implementation and cost, investing in deployment will help overcome the market barriers which hinder the development of clean energy economy (6). Deployment and innovation go hand in hand. To build low cost clean energy infrastructure in a relatively short period which is economically sustainable in long term, both innovation and deployment must be balanced.

References

1. Robert M., et al., Evidence of Under-investment in Energy R&D in the United States and the Impact of Federal Policy, Energy Policy, 1999
2. David F., et al., “Photovoltaic System Pricing Trends”, US Department of Energy, Historical, Recent and Near Term Projections, 2014
3. Makena C., et al., A Policy Analysis of Hawaii’s Solar Tax Credit Incentive, University of Hawaii, 2013
4. The Logic of Deployment, Deployment, Deployment, R&D, Deployment, Deployment, Deployment, Clean Technica, 2011
5. Angelo Y., Tesla Motors (TSLA) 1Q 2016 Sales: 14,820 Model S, Model X Cars Were Delivered in First Three Months; Model S Sales Jumped 45%, International Business Times, 2016
6. Bryan W., Energy: Research Vs Deployment, Time, 2010
7. Megan N, et al., Challenging the Clean Energy Deployment Consensus, The Information Technology and Innovation Foundation, 2013
8. David B., Accelerated Innovation Is the Ultimate Solution to Climate Change, Scientific American, 2015