How to speed up energy innovation

Professor Rebecca Henderson of Harvard Business School, with coauthor Richard Newell, is publishing a new book, Accelerating Innovation in Energy: Insights from Multiple Sectors.  I like is that her background is in innovation and structural transformation, not energy -- a refreshing break from some of the people currently driving energy policy at the federal level. 

While moving to a low-carbon economy is extremely challenging, this is hardly the first major shift in the way society operates.  If we can avoid recreating the wheel at every turn (especially all the versions that failed), we will be far better off.  I'm hopeful that Henderson's insights from these other sectors and experiences will be helpful not just in flagging potential energy solutions (I'm quite skeptical on choosing the best technologies in advance) but more importantly in helping to reshape the way that policy makers see the problem.

One can't tell too much from the brief blurb in the business school's magazine that I've linked to above.  However, a few areas from the write-up warrant some discussion. 

First, the idea of agriculture as a sound model for energy transformation puts up some red flags for me.  There is no denying that the past 100 years have brought tremendous innovation in seed varieties, food processing and storage, and plant productivity.  However, the system is hardly an optimal one.  Enormous subsidies in both the US and Europe have distorted farm economies around the world, and the resulting structure of agribusiness seems more influenced by powerful political decisions than by market demand.  Many of these policies have favored increasing scale of operation, in the process compounding the political challenges of regulating the sector.  In addition, the homogeneous cropping systems and input-intensive land use patterns that dominate US agriculture have often involved very high environmental costs -- costs that have usually not been internalized by producers.  These elements of our agricultural system would be disasterous to replicate in the energy sphere.

Second, Henderson notes that energy is a commodity that can't be differentiated.  While the electrons delivered to users may be identical, that does not mean that differentiation is not possible.  In fact, one of Henderson's starting points for a solution is a carbon tax -- something that can be viewed as one form of energy differentiation (low-carbon electrons versus high-carbon electrons). 

There are other points of differentiation that could also play an important role in remaking our energy economy.  Time of delivery pricing should be more visible to end-users, as should congestion charges on transmission infrastructure.  Similarly, transparent pricing of transmission can more effectively show break-points between decentralized power resources and grid extensions.  All help move from homogenous energy to more differentiable "energy services," a shift that Amory Lovins at the Rocky Mountain Institute has long advocated.  Rather than a single entry point on pricing and delivery, this type of variation can provide opportunities for niche energy providers with alternative delivery models. 

Similarly, much more transparency in the economics of energy extraction and transformation can help differentiate energy resources, monetizing the benefits of lower-impact power resources.   Existing federal policy too often does the opposite.  Too much air pollution from coal?  Offer tax-exempt bonds for pollution controls.  Large damages from a nuclear accident or oil spill?  Cap private sector liability by statute.  Much better would be to force all of these costs through to the market price of these respective energy resources.

Third, I like their concept of an "innovative ecosystem" -- the idea that a policy environment can be structured to enable public and private interests to collaborate in innovative ways.  Doing this in practice does seem challenging, though.  The combination of enormous lobbying machines that so effectively advocate for their clients at the federal level and political leaders anxious less in broad-based competitive energy solutions than in earmarked funding for their home industry are well funded and omnipresent. Too often, even what starts as a well-meaning attempt to create such a policy environment turns into a subsidy spigot to specific firms or technologies.  I'm interested to see how Henderson and Newell address and manage this problem, and what lessons from biotech could be applied to energy.

My take on setting up a policy environment for energy structural transformation can be found here.