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Chapter 4: Barriers to the development and deployment of clean energy technologies.

Numerous factors are responsible for the limited success of traditional RD&D programs in the energy sector and for discouraging private sector investments. This chapter provides an overview of the most important macro-barriers that need to be overcome to increase the effectiveness of energy RD&D. It should be noted, however, that in addition to the barriers discussed here, numerous other context-specific micro-level barriers hamper the development, transfer, and diffusion of new technologies, especially in developing countries (see for example, World Bank 2008).

Negative Externality of Carbon Emissions Is Difficult to Valuate

There is no reliable valuation for the primary product that clean energy products deliver: reduced emissions. Consequently, the private sector has little incentive to develop cleaner technologies that reduce emissions. Nearly all aspects of energy production, transformation, and use result in CO2 emissions that accumulate in the atmosphere. This negative externality is not valued and therefore not factored into investment decisions by energy providers, particularly by the private sector. As a result, energy-related decisions are made without reflecting their full costs and investments in clean energy technologies are lower. A patchwork of policies is slowly evolving; the current system is not easily predictable over the medium- to long-term and does not include the majority of global emissions. The magnitude and scope of any future carbon valuation is still subject to substantial political risk. Consequently, the future value of GHG emissions is discounted significantly in investment decisions and does not yet provide sufficient incentives for RD&D investments.

Climate Change Mitigation Is a Global Public Good

Climate change mitigation is a classic example of global public good: emission reduction from a single party benefits that party and everyone else. Although the costs of abating GHG emissions are borne by specific entities, no country or private actor can be excluded from the benefits. Emission reduction efforts invite free-riding behavior across space (by some countries free-riding on the efforts of others) and across time (by countries and private actors avoiding the costs of mitigation now because the benefits of timely mitigation will be reaped by future generations). This free-riding extends to energy technology development because the benefits accrued to any entity represents only a small share of the global benefits. Consequently, the private sector and governments will tend to underprovide for clean energy RD&D.

The "Valley of Death" between Public- and Private-Sector Development

The public and private sectors both play important roles in technology commercialization. The public sector normally begins the process with basic scientific research, often without specific end-products in mind. Much of this research is lab-based and involves high risks with potentially high return with great uncertainty of the impacts. As technical challenges are overcome and product ideas appear with profit potential, the private sector becomes increasingly involved. The risk is still high--as are the potential returns--at this stage but the products under development are now much closer to commercial application.

The "valley of death" refers to the period in product development between public and private sector involvement (see Figure 5). The major technical problems have been solved in the lab and one or more potentially profitable products have been identified. At this point, public-sector participation usually declines as the government backs away from "picking winners." Furthermore, governments do not want to subsidize private industry or distort the market because investors stand to profit handsomely from the ultimately commercial products. However, the private sector often still sees too much risk to get fully involved and to continue the product development process on its own (see "mountain of death" in the following section); promising technologies do not progress to the demonstration and scaleup stages needed to achieve full commercialization. Although many technologies do eventually make it through this period--either through additional public, private, or combined efforts--this gap seriously delays commercialization and prohibits the rapid deployment of clean energy options in the urgent time frame needed.


The "Mountain of Death" of Technology Costs

Technological innovation requires progression along the learning curve. Initial steps focus on component parts of a larger desired technology. Because these components represent only a portion of the total system, funding to develop and test them will be small compared with the full cost of the entire system. After researchers achieve some level of success with individual components, the next step is to integrate the components into the full system. The first full integration represents the highest per-unit cost that the developers will likely face. As more is learned about both the system as a whole and the individual components, and as economies-of-scale are achieved in the manufacturing costs, per-unit costs will fall. Eventually the technology reaches maturation, at which point the per-unit costs will be sufficiently low and technical reliability will be sufficiently high to warrant continued manufacturing of a commercial product.

This process of rising and then falling per-unit costs is referred to as the "mountain of death" for new technology innovation (see figure 6). It can deter R&D by requiring substantial upfront costs to develop and build products that, for a while at least, are not commercially viable. The "mountain of death" is a key reason that private companies are reluctant to invest in pilot and demonstration plants, and thus contributes significantly to the "valley of death" phenomenon.


Technology Needs of Developing Countries Are Not Adequately Served

Because large shares of emissions are projected to come both from developed and developing countries, emission reductions must be achieved in all regions of the world. Developing countries' share of global emissions is projected to increase from 39 percent in 2004 to 52 percent in 2030 (IEA 2006b). However, the incentives are low to develop clean energy technologies to serve the specific needs of these countries. While many energy technologies can be applied in all countries regardless of their conditions (such as a behind-the-fence CCGT power plant), other technologies must be adapted to local circumstances. Technologies to be adapted include end-use technologies suited to local consumption patterns, technologies to operate in the absence of a strong operations and maintenance support network, technologies to serve distributed generation or low-energy density-demand areas, and resource mapping for renewable energy sources. The vast majority of resources and expertise for technical innovation are in the OECD countries, which are rarely motivated to develop products suited solely for the poorer countries. OECD governments will naturally promote research that serves their own citizens and economies. Similarly, private industry often regards markets in developing countries as less attractive due to lower capacity to pay, higher transaction costs, weaker contract law and intellectual property rights, and general unfamiliarity.

Figure 7, drawn from UNEP's "Global Trends in Sustainable Energy Investment 2007" (UNEP 2007) shows the disparity of investments in sustainable energy between developed and developing countries. Although "sustainable energy" in this context refers only to renewable energy and energy efficiency (thus leaving out many CETs such as CCS), and the figure does not explicitly split out RD&D investments, the trend is very clear: The disparity between wealthy and poor countries in RD&D investments covering the full range of promising CETs is even larger.

Intellectual Property Right Protection is a Concern

The amount of R&D in any field is affected by the strength of intellectual property right (IPR) protection. Companies that invest heavily to develop new technologies must be guaranteed the benefits of their innovations. In most OECD countries, IPR protection is sufficient and--although not perfectly flawless on an international basis--this protection generally works well among countries within the industrialized world. However, the fear of substantially weaker IPR protection in many developing countries--and the corollary threat of technology theft--deters investment in this field. For some energy technologies, for which sophisticated technological advances and large sums of capital are required, this factor is particularly relevant. Strong IPR can improve incentives to develop such technologies. Yet, strong IPRs deter the adoption and diffusion of new technologies once they are commercialized. For other clean energy technologies the competition-limiting effects of IPR are less pronounced, especially if compared with other sectors, such as pharmaceuticals. In fact, the basic approaches to solving a technological problem have often long been off-patent for clean energy technologies and thus only specific improvements or features are protected by IPR. This allows for considerable competition between patented products (Barton 2007).


The Network Structure of the Electricity Sector Limits Integration of New Technology

Electricity sectors are organized around a model of large centralized power-generating stations that distribute electricity to end consumers along a vast network of transmission and distribution lines. With such a highly coordinated system, it is more difficult to introduce a new technology that does not fit well with the other existing components. For example, renewable energy systems with intermittent generation for example (such as wind and solar) face barriers being integrated into an electricity system that is designed around fully dispatchable generating units. Another example is distributed generation, whose potential can only be fully realized if allowed to sell electricity back into the grid, which most transmission and distribution networks are not equipped to receive.

National Interests Can Impede International Collaboration

International cooperation on clean energy technology development can effectively pool funding and share technical expertise, with each country contributing according to its area of expertise. However, governments, with their mandates to serve national interests, may be insufficiently motivated to participate in such cooperation. This impediment to clean energy RD&D can take different forms, including the following:

* Unwillingness to share advanced technology. Clean energy technologies may be a large market and technical advances that help commercialize clean energy products could become very valuable. Governments will naturally not want such advances that are developed by their own research or industries to be spread internationally without compensation.

* Promotion of own industrial concerns. Governments have an interest in promoting their own companies and industries. Thus, funding and other support will be less likely to go toward international efforts that support the industries of other countries.

* Desire to control and take credit for funding. By pooling funding from other countries, governments lose a degree of control over how money is spent. Governments will also have to share the credit for any advances that come from collaborative efforts.

While many international fora have been established to overcome national governments' reluctance to cooperate on clean energy technology development, to date these fora have very rarely extended to actual R&D efforts and focus primarily on information sharing and setting benchmarks. (5)

Energy RD&D Can Require Large, Sunk Capital Investments

The nature of the physical assets required to perform energy R&D can deter activity in the sector. The equipment needed for much of the energy R&D requires large, up-front capital investments. For example, the IEA estimates that a single CCS demonstration facility would cost between $500 million and $1 billion (IEA 2006a, 199). This investment makes much energy R&D possible for only a selected number of large companies. Also, the assets are highly specialized and have little, if any, value beyond research purposes, making them truly sunk costs. Thus, energy R&D is riskier than R&D in other sectors where the technical infrastructure would retain more of its value even if the research did not produce useful innovations. This higher risk leads to higher cost of capital and is thus a barrier for most energy RD&D.

The Commodity Nature of Electricity

Electricity is a homogeneous good that is indistinguishable in terms of its source or production technology. Consequently, electricity is traded on commodity markets and producers are not able to differentiate their product by quality and price. Electricity producers are therefore less able to extract price premia on innovative products from early adopters and quality-conscious consumers--a key source of R&D financing in other industries. Consequently, R&D in new electricity-generation technologies is undermined.

"Carbon Lock-in," Subsidies, and Barriers to Trade

Current fossil fuel-based and carbon-intensive energy systems have benefited from long periods of increasing returns, creating positive feedbacks that reinforce the dominance of existing systems. This situation, termed "carbon lock-in," applies both to the technologies and the institutional structures that support them, creating significant barriers to the adoption of new technological alternatives (Foxon 2003).

Subsidies are one of the most obvious drivers. In fact, many countries have explicit or implicit subsidies for energy products. These subsidies are intended to favor certain consumer groups, support local energy production, or build political support. The IEA has estimated that in 2005, governments around the world provided $250 billion of subsidies to lower the price of energy to final consumers (IEA 2006b, 277-81). These subsidies cover energy products ranging from natural gas to oil products to electricity. Subsidies for established technologies deter RD&D because any new technology entering the market must compete against artificially low-priced alternatives. Also, the below-cost prices paid by consumers deter energy efficiency and thus the incentive to develop and deploy new energy-efficient technologies.

In addition, varied levels of tariff and nontariff barriers are impeding the diffusion of clean energy technologies in developing countries. For example, energy-efficient lighting in India is subject to a tariff of 30 percent and a nontariff equivalent of 106 percent (World Bank 2007b).

Imperfect and Asymmetric Information

Incentives to innovation are also constrained by the imperfect nature and uneven distribution of information between different innovators as well as between users and producers of technology. The development of new technologies is widely dispersed between different institutions and countries. Although competition is a key driver to innovation, limited information sharing due to concerns about loosing one's competitive edge and high transactions costs can also considerably slow down technological advancements. Limited opportunities for information sharing about future demands and future technological possibilities between technology users and producers also reduce incentives for innovation.
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Title Annotation:Accelerating Clean Energy Technology Research, Development, and Deployment: Lessons from Non-energy Sectors
Publication:Accelerating Clean Energy Technology Research, Development, and Deployment
Geographic Code:0DEVE
Date:May 1, 2008
Previous Article:Chapter 3: Trends in energy research and development spending.
Next Article:Chapter 5: Case studies of technical innovation from other sectors.

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