Energy system transformation : an evaluation of innovation requirements and policy options

Abstract

The U.S. government and others around the world have been exploring strategies to respond to climate change for nearly two decades. Consideration of these efforts as well as the 2010 oil spill in the Gulf of Mexico, the 2011 nuclear accident at Fukushima Daichi, and improved shale gas recovery methods are spurring debate on energy policy options. An important focus of this debate is the role of innovation in reducing carbon emissions while also maintaining the affordability of energy supplies. The scale of the required transition to a low-carbon energy system is large. A simple calculation scheme based on the Kaya identity is used to evaluate this transition and to estimate the magnitude of the changes that would be required. The recent performance of the U.S. economy with respect to decarbonization and energy intensity is shown to fall far short of future needs in low-carbon scenarios. The MARKAL model is used to estimate the magnitude of the capital investment required to transform the U.S. electric power sector. A comprehensive treatment of the innovation process must consider not only research and development but also the 'downstream' stages of demonstration, early adoption, and evolutionary post-commercialization improvements. Under greenhouse gas reduction scenarios, investments will be needed in low-carbon technologies when there is still considerable uncertainty and risk associated with their performance, and when they may not be competitive with incumbent energy systems. No less than investments in research and development, these are investments in innovation. A two-stage model of the innovation process is used to estimate the investment needed to bring a new technology to a competitive cost level. The model is used to explore the contributions of early-stage and later-stage investments in innovation, and illustrates the importance of the technological learning process. A case study of innovation in the nuclear energy industry is used to evaluate the effectiveness of alternative policies for driving investment in energy technologies more generally. The case study reveals a pattern of erratic policy that discouraged private investment. The use of technology-push rather than market-pull policy tools is found to have encouraged technology lock-in and discouraged market-driven innovation.