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Govt. Role in Energy R&D Is Key Amid Challenging Times

By Margot Anderson

Friday, December 5, 2014

Yet again, Congress appears poised to pass a retroactive, one-year extension of the clean energy and research & development tax credits. But retroactive short-term extensions and underfunded R&D programs will not meet America’s energy challenges, or deliver on the remarkable economic promise that breakthrough technologies can provide. Instead, we urge Congress to return to these issues next year and enact sound tax policies combined with robust federal and private R&D to help us meet the challenge of providing safe, clean, affordable energy in sufficient amounts to power our nation in the years ahead.

We at the Bipartisan Policy Center are proud to support the work of the American Energy Innovation Council, an independent group of six business leaders who are deeply concerned about America’s insufficient response to the nation’s energy challenges and opportunities. These individuals—Norm Augustine, John Doerr, Bill Gates, Charles Holliday, Jeff Immelt and Tom Linebarger—have all overcome significant business and technology challenges throughout their careers, and we are grateful for their work to develop and deliver policies to advance clean and affordable energy innovation.

Energy issues permeate many of the key hurdles faced by our nation: the often uncertain availability of stable and reliable supplies, price volatility and its impact on investment and consumers, the hazards of energy-related pollution on the environment, and the role of constrained and manipulated energy supplies as a source of armed conflict. Given the many demands facing America today, the provision of safe, clean, affordable and sustainable energy is, by virtually any standard, one of the foremost challenges we face.

Meeting this challenge requires a robust, stable stream of both government and private sector investments in energy in addition to thoughtful, rather than ad hoc, tax policy. Together, these tools can spur innovation and encourage private sector development and deployment of new technologies.

In the past few years, AEIC has produced multiple analyses and recommendations on the role of government research, development and partnerships in driving innovation in energy technology. AEIC highlights the need for a more vigorous public commitment to energy technology development. America’s investment in energy innovation from the public and private sectors together is less than one-half of 1 percent of the nation’s energy bill. This fraction is eclipsed by the innovation investment in most other sectors, particularly those in the high-tech arena. Meanwhile, we send $1 billion abroad each day to pay our energy bill to foreign producers. AEIC has called for roughly a tripling of U.S. energy R&D spending as a key economic, national security, energy policy and environmental priority.

AEIC has also documented the critical historic role the government has played as a catalyst to private-sector innovation. Significant innovations like unconventional gas exploration and production; aero-derivative gas turbines; alternative vehicle technologies; advanced diesel internal combustion engines; and low-emissivity windows are strong examples of successful government and private sector interaction.

America relies on high-quality research to create new knowledge, on world-class engineering to convert that knowledge into new or improved energy sources and delivery means, and on enlightened entrepreneurship to translate those sources and delivery means into the marketplace. Fortunately, we have historically excelled in all three of these activities, which together make up innovation—although we are now losing our lead in at least two of these attributes.

In addition to funding basic research, government can lower risks of new technology to the private sector through seed grants, loans and cost-sharing of demonstration projects; speed diffusion of technical knowledge through research partnerships; and standardize information to help markets work better through labeling and certification efforts. Sometimes, the government plays the role of an instigator—creating new economic possibilities for private-sector activity.

In pursuing the creation and deployment of new or improved technologies, it is not uncommon to encounter what many innovators refer to as “The Valley of Death”—that period where an idea appears promising but has not yet been demonstrably shown to be workable in practice—and therefore is deemed too risky by most investors. To surmount the latter generally requires some form of convincing proof-of-principle demonstration, which in turn requires significant, sustained and hard-to-come-by financial resources—leading to underinvestment in potentially promising innovation.

There is also a second “Valley of Death” that occurs after proof-of-principle using a prototype to verify market utility or economic viability, with a near commercial-scale demonstrator. This second period of vulnerability, which also deters investors, is a consequence of the large-scale characteristic that often accompanies energy projects, making it very expensive to remove uncertainties as to ultimate scalability of an otherwise promising project.

Further complicating energy innovation is the capital intensiveness of most forms of energy production, delivery and storage, a characteristic that makes the economic threshold very high for replacing old plants with new ones. In short, due to the risk, expense and uncertainty entailed, private sector investment will often be unavailable to bridge the valleys and the gaps—which is why there is a critical role for publically funded support, particularly for basic energy R&D.

Each of these challenges can be addressed through a combination of robust government R&D investments on basic scientific breakthroughs related to energy and thoughtful tax policies that together drive innovation and encourage private sector development and deployment of new technologies.

AEIC strongly supports robust, public investment in energy technology and innovation. We support the America INNOVATES Act that calls for better coordination among innovation activities at the Department of Energy, that gives the National Labs needed flexibility for partnerships with businesses and universities and that reduces administrative burdens. AEIC also supports reauthorization of the 2007 America COMPETES legislation, including continuation of the Advanced Research Project Agency-Energy (ARPA-E).

On tax policy, Congress must move beyond on-again/off-again, short-term incentives. Instead, energy tax policies should:

Encourage development and deployment of domestic, clean and low-emission sources of energy;
Strive to be technology- and energy source-neutral; and
Be predictable, not subject to year-to-year renewals, but also not permanent.
Under a technology- and source-neutral approach, existing source-specific tax incentives could be phased out over time to allow a predictable transition for investors. Phasing out existing, source-specific energy subsidies and incentives should also free up revenue, a portion of which we believe should be devoted to increasing U.S. energy R&D investments.

Although AEIC leaders are strong devotees of free enterprise as opposed to government involvement in markets, the energy dilemma is exactly the sort of issue that calibrated government action can help solve. There is an important benefit to be had by the citizenry as a whole, but private resources cannot, or will not, provide that benefit because of financial risk, extensive delays in receiving small or even negative returns and the possibility that the returns will not even accrue to the investor or performer.

This circumstance is one that has long been recognized by our government in a number of areas, including many involving the application of technology. Commercial nuclear power was the result of government investments in naval reactors; commercial jet aircraft trace their origin to military transports; GPS to military positioning systems; the Internet to packet-switched networks demonstrated by ARPA; and communication and weather satellites to military space programs.

These achievements were in some cases by-products of the government’s pursuing other missions in the interest of its citizens. But the provision of energy is itself a mission of the utmost importance to our way of life. Policymakers can and must do better.

This post was originally published by RealClearPolitics.

KEYWORDS: AMERICAN ENERGY INNOVATION COUNCIL (AEIC), BILL GAGES, BPC OP-EDS, CHAD HOLLIDAY, JEFF IMMELT, JOHN DOERR, MARGOT ANDERSON, NORMAN AUGUSTINE, TOM LINEBARGER