What Should the Government Do To Encourage Technical Change in the Energy Sector?

Abstract

Government support of innovation—both technology creation and technology demonstration—is desirable to encourage private investors to adopt new technology. In this paper, I review the government role in encouraging technology innovation and the success of the U.S. Department of Energy (DOE) and its predecessor agencies in advancing technology in the energy sector. The DOE has had better success in the first stage of innovation (sponsoring R&D to create new technology options) than in the second stage (demonstrating technologies with the objective of encouraging adoption by the private sector). I argue that the DOE does not have the expertise, policy instruments, or contracting flexibility to successfully manage technology demonstration, and that consideration should be given to establishing a new mechanism for this purpose. The ill-fated 1980 Synthetic Fuels Corporation offers an interesting model for such a mechanism.