By Steven Koonin | 7 March 2013
Director, Center for Urban Science and Progress, New York University, USA
There are compelling reasons to improve our energy system – to increase accessibility, affordability and reliability and to reduce environmental impacts. Yet the energy system has historically evolved much more slowly than other technology-dependent sectors. It took eight decades for oil to overtake coal as the US primary energy source, while mp3s replaced CDs and tapes in only three years. If we aspire to improve the energy system, it is important understand both the reasons why our energy system changes so slowly and the motivations of those with the resources to affect true transformation.
Energy change is sluggish as a result of scale, ubiquity, longevity, interdependence and incumbency. Energy infrastructure is expensive and long-lived; a single power plant is a multi-billion dollar investment with a lifetime on the order of decades. Further, the energy sector has a multitude of stakeholders with varied interests (governments, citizens, private industry and NGOs), and its many parts must all function as an integrated system. Last, as is true with any commodity, the consumer cannot distinguish among products from different sources, and so suppliers see incumbency as a considerable advantage.
These factors also underscore the challenges for governments to affect material change in the energy sector. Although many cite the Manhattan Project and “Moon Shot” as potential models for government catalysis of energy transformation, those projects were of singular focus, were funded entirely by the government and had little impact on the daily lives of citizens. For energy transformation, we need not only scientific innovation but also large-scale deployment.
In nations where the government operates the energy system, any energy technology that doesn’t violate physical laws can be deployed given sufficient time and capital. But in those nations where free enterprise and market systems dominate, transformation will be achieved only with the participation of private industry and large corporations. Because industry’s goal is legal and predictable profit, energy transformation must be either profitable or mandated to occur. To provide meaningful incentives, government must accurately understand the risk/reward perspective of industry.
To make the investments necessary for any particular energy project, industry must balance several decades of return against a multitude of risks, including capital, construction, technology, operations, supply, business model, market and policy. The number of risks, combined with the size of capital required and the commoditization of power and fuels, makes technical conservatism the norm of the large corporations typically involved in the energy supply sector.
Beyond conventional industry, some have suggested venture capital is the appropriate mechanism to engender transformation in the energy sector. While venture capital has both the inclination and the capacity for high-risk, high-reward investment, it does not have the funds or business model required for the scale of deployment – or duration of investment – necessary for true transformation of the energy supply sector.
To shape the energy system, every step a government takes must be framed the way the private sector operates – in terms of risk and reward. Governments can mitigate the risk to investment in new energy technologies through funding innovative research, integrating diverse perspectives and informing effective policy.
Loan guarantees and tax credits reduce capital risk for technologies that are nearly ready for investment by large corporations. Government can also reduce capital risk by investing in applied research and technology development that shrink typical project size, such as small modular fission reactors and distributed generation technologies.
Easing the interface between government-funded research and industry to aid the demonstration of new technology can mitigate technology risk. The US Department of Energy has several projects that blur these lines, including the Energy Frontier Research Centers, Energy Innovation Hubs, and Advanced Research Projects Agency-Energy (known as ARPA-E). Government assets in computer simulation and test beds can also be leveraged to demonstrate new technologies and emphasize lessons learned and international partnering to accelerate technology risk reduction.
Market and policy risks must be mitigated with effective and predictable policies targeted at energy goals at every level of the government. Regulatory uncertainly increases market risk and limits investment by the private sector.
Transformation of our energy system is both necessary and difficult. To succeed, we must acknowledge that its scale presents unique challenges that require industry participation, and shape government policies according to the risk/reward calculations at the core of the private sector.