watson - innovation policy - how - should priorities be chosen tips-spru nov07

8/8/2019 Watson - Innovation Policy - How - Should Priorities Be Chosen TIPS-SPRU Nov07

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Sussex Energy GroupSPRU - Science and Technology Policy Research

Innovation policy:(How) Should Priorities be Chosen?

Jim WatsonSussex Energy Group

TIPS/SPRU Workshop, Berlin, 27-28 November 2007


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Innovation Policy

How Should Priorities be Chosen?

1 Rationales for public support

2 Why make choices?

3 How might choices be made?

4 Conclusions


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Rationales for public support

for low carbon innovation

Traditional market failures:

Social returns from R&D cannot be fully captured by privatefirms, so they will tend to under invest

Environmental externalities (particularly social cost of carbon)justify market support for deployment

System failures

The need to build capacity and skills, and develop new networks(e.g. micro-generation installers; electricity network R&D)

Lock-in of existing technologies, institutions create passivebarriers to innovation (e.g. centralised infrastructure)


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But should government stay out

of technology choice?

A prime consideration must be to create the right framework which

will reward the best, most cost-effective technologies andencourage their development. This means a policy that is not aboutpicking winners, but which allows the market to provide appropriateincentives.

Interdepartmental Analysts Group: Long Term Reductions in Greenhouse Gas Emissions in the UK. February 2002


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Why make Choices?


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Why make choices?

1. Failures as learning

Picking winners is a great idea if it can be achieved

Perhaps avoiding picking losers is more accurate this leads to anunderstandable aversion to overt priority setting

But failure is a learning process learning by doing not learningby speculating (e.g. CCS costs and performance is uncertain untilyou build a full scale plant)

Processes of review must be in place to avoid dependency; allowsupport to be withdrawn as likelihood of success diminishes


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Why make choices?

1. Failures as learning

Uncertainty over the economies of scale and learning-by-doing

means that some technological failures are inevitable. Technologicalfailures can still create valuable knowledge, and the closing oftechnological avenues narrows the investment options andincreases confidence in other technologies.

Stern Review Report, Chapter 16


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Why make choices?

2. Governments vs markets

The idea that government cannot pick winners and that the market

is better placed to make choices is a caricature Government have backed failures in the past (supersonic

passenger aircraft, fast breeder reactors)

Government spending has also had positive outcomes, e.g.

Cost reductions in global PV market

CCGT technology (source of UK carbon emissions reductions)

Market mechanisms are predisposed to pick options that are

nearer to commercial readiness e.g. the UKs RenewablesObligation and wind power


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Why make choices?

3. Resource Constraints

0

100

200

300

400

500

600

700

800

1 9 7 4

1 9 7 6

1 9 7 8

1 9 8 0

1 9 8 2

1 9 8 4

1 9 8 6

1 9 8 8

1 9 9 0

1 9 9 2

1 9 9 4

1 9 9 6

1 9 9 8

2 0 0 0

2 0 0 2

2 0 0 4

S p e n

d i n g

( 2 0 0 4 s )

Conservation Oil & Gas Coal RenewablesNuclear Power & Storage Other

Source: IEA

UK Energy R&D Spending


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Why make choices?


0

1000

2000

3000

4000

5000

6000

7000

8000

9000

1974 1979 1984 1989 1994 1999 2004

S p e n

d i n g

( 2 0 0 5 $ )

UK USA Japan France Germany

Source: IEA


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But data from IEA dont cover everything. Some UK funding notincluded in these figures, e.g.

Funding for agencies like the Carbon Trust Funding for technology deployment (e.g. 1bn on Renewables

Obligation by 2010; new Environmental Transformation Fund)

Also misses out private sector funding: US and EU data show falls in private sector funding for energy

R&D since late 1980s; also falling patent activity

Multinationals are key in many areas of energy system, but can

their spending be analysed accurately?

Why make choices?



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How might choices be made?


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Policy analysis of economics of low carbon technologies isimportant, but often neglects financial risks

Stage of development of different technologies can influence typeof mechanism that is most appropriate

Diversity is a good strategy, but how should it be put intopractice?

Industrial policy has been out of fashion in the UK since the 1970s,but it is often a factor in other countries decision making


Four issues


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Need to consider costs and risks

Old windOld hydro

New offshore wind New CoalNew Nuclear

Old Gas

New GasNew onshore wind

Old nuclearOld coal

DTI 2000 mixDTI 2010 mix

DTI 2020 mix

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0.18 0.20

Risk (standard deviation)

G e n e r a t i n g

C o s t

( p / k W h )

Source: Awerbuch, Jansen et al, 2005


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Experience curves can bring costs down

Source: Watanabe et al, 2000


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Experience is sometimes unhelpful

0

500

1000

1500

2000

1965 1970 1975 1980 1985 1990 1995 2000

C a p

i t a l

C o s t s

( $ 1 9 9 6 / k W )

CCGT Conventional Coal

Source: Watson, 1997


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Stage of development is important

Stage 1 (R&D) Stage 2 (earlydemonstration)

Stage 3 (refinement& cost reduction)

Stage 4 (earlycommercialisation)

F u n

d i n g

Current Policy Framework Ideal Profile

Source: Carbon Trustvalley of death


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Stage 1 (R&D) Stage 2 (earlydemonstration)

Stage 3 (refinement& cost reduction)

Stage 4 (earlycommercialisation)

P o s s

i b l e M e c

h a n i s m s

Current Policy Framework Ideal Profile

Capital grants

Performanceincentives

Performanceincentives

(e.g. carbonprice)


Stage of development and funding

R&D funding

Tax breaks


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Sussex Energy Group

SPRU - Science and Technology Policy Research


Diversity in practice Diversity seen almost universally as a good idea, but what does it

mean?

Variety (number of options in a portfolio) Balance (relative shares of these options)

Disparity (how different options are from each other)

Resource constraints may mean supporting all options is notdesirable or possible

Technologies might interact and should not be considered inisolation from each other

In the UK, risk that new nuclear programme will divert politicaland economic resources from other options


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Sussex Energy Group



Energy policy & industrial policy

In the past the steam engine, the internal combustion engine, themicro-processor transformed not just technology but the way oursociety has been organised and the way people live.

Now we are about to embark, I believe, on a comparabletechnological transformation to low carbon energy and energyefficiency and this represents an immense challenge for Britain, butit is also an opportunity.

Gordon Brown, 19 th November 2007


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Sussex Energy Group



Energy policy & industrial policy

[T]he first programmes of the 1 billion public/private EnergyTechnologies Institute will be focused on R and D in offshorewind, in wave and tidal stream energy, and the new 370 milliondomestic environmental transformation fund will help bring thesetechnologies to the marketplace, creating businesses and jobs.

Gordon Brown, 19 th November 2007


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Sussex Energy Group


Conclusions


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Sussex Energy Group


Pricing carbon and is necessary but not sufficient should becomplemented by technology-specific measures

Energy R,D,D & D funding needs to be increased and rebalanced(Manhattan Project comparisons are perhaps simplistic)

These prescriptions mean that government needs to take morerisks (e.g. risks of being captured by lobbies, risks of failure)

To deal with these increased risks, the following may help:

Plural institutions to guard against policy capture by lobbiesand to deal with complex issues

More transparency in process of priority setting More systematic evaluation of current / past policies with

willingness to cut funding to losers

Conclusions


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Sussex Energy Group


Conclusions

How is UK policy doing? Still too much emphasis on EU emissions trading scheme, but

increasing number of specific measures (e.g. on CCS)

Significant increases in funding for R&D and deployment, but stillquestion of valley of death

Government still very risk averse and obscured by pickingwinners debate. Would rather analyse costs of new technologyprogrammes than implement them.

Complex, plural institutions though unclear how they all fittogether or where gaps are

Lack of transparency on selection process though somepriorities clear (CCS, offshore renewables, nuclear?)

Evaluations are hidden or missing; support to new industriescut before they have got going


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Sussex Energy Group


Thanks

http://www.sussex.ac.uk/sussexenergygroup

watson - innovation policy - how - should priorities be chosen tips-spru nov07

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