Understanding the Innovation Dividend of Clean Energy Investment
While current political discourse seems to focus on what divides us, there are many topics on which people from across the political spectrum seem to agree. One of these is the critical importance of innovation. Innovation can create jobs, bolster our economy, and improve our lives. In clean energy, regular innovations arise in electric vehicles, grid technologies, industrial efficiency, renewable energy, building energy efficiency, and other applications. Breakthroughs come not only in physical form from research universities or national labs (e.g., solar panels or batteries), but also through new commercial applications and business models from the private sector (e.g., community solar or PACE).
Given general agreement on the benefits of innovation, and the particular advantages in clean energy, what then is it that stimulates innovation, and why has the clean energy ecosystem been particularly successful in nurturing it? Until a thorough assessment of this dynamic is complete, we offer a few initial observations from the course of our work at Rocky Mountain Institute.
Focus on Research
Whether conducted by business schools or national laboratories, think tanks or universities, research has been core to innovation. Businesses often take discoveries from these institutions and refine them further to achieve broader scale and commercial success. One example of this symbiotic relationship is the Internet, where breakthroughs pioneered by government research became building blocks for the devices, apps, and infrastructure developed by businesses.
In 2000, the U.S. ranked fourth in the world in R&D spending as a percentage of GDP (including R&D carried out by all resident companies, research institutes, university and government laboratories, etc., in a country); in 2015, the U.S. ranked tenth. While spending is not the only metric of research activity, we believe that it is often a leading indicator of future innovation. Over the past years, our nation’s commitment to R&D in clean energy has helped spur early success. We encourage U.S. policymakers to continue—or ideally, expand—their support for government-funded research, and enact policies to encourage businesses and academia to further their research activities in clean energy.
Network of Entrepreneurs, Capital Providers, and a Culture That Permits Prudent Risk-Taking
Innovation requires entrepreneurs, and entrepreneurs require capital. Although innovation is most closely aligned with the venture capital industry, breakthroughs require different types of funding from a wide range of providers. This includes government programs, public equity markets, banks, specialty finance companies, and “green banks” (themselves an example of capital markets innovation). These and other financial intermediaries have critical and differentiated roles to play depending on the innovation and its stage of development.
Perhaps more difficult to create is a culture that permits entrepreneurs and capital providers to risk their capital. This is partially a function of the entrepreneurs and capital providers themselves, but is also due to the regulatory environments in which they operate. In the U.S., for example, there are capital providers that are highly regulated (to ensure overall stability of the financial system) and lightly regulated (to fund more risky endeavors). While acknowledging the importance of stability, we believe that some portion of the financial system must provide adequate risk capital to foster innovation. And would-be entrepreneurs must also find an environment that supports risk-taking.
Legal, Regulatory, and Tax Policies That Encourage New Markets and Technologies
Laws governing corporate behavior exist for many important reasons, including protecting consumers and the environment. At the same time, these laws can increase the cost of business or, in some cases, prevent certain innovations altogether. Policymakers have difficult decisions to make in striking this balance.
Similarly, regulations exist for much the same reasons. For example, the delivery of electricity is highly regulated to ensure safety, reliability, and affordability. Nevertheless, innovations in distributed energy resources (e.g., rooftop solar, battery storage) can, if properly incorporated into the electricity system, reduce costs, enhance resilience, and lessen the adverse environmental impacts of the energy system. Given this, regulators should be willing, in discrete locations or at specific times, to carefully experiment with new technologies and market structures. These trials can speed the deployment of new innovations, while, by yielding lessons in limited settings at their outset, lessen risk to market participants overall.
As to tax policy, at a simplistic level, policies should favor desirable outcomes (e.g., clean energy) over less desirable outcomes (e.g., polluting technologies). This can be done through incentives (e.g., investment tax credits, reduced tax rates) or disincentives (e.g., taxes on certain products or activities). Those drafting tax policies should consider, among other things, their effectiveness in driving innovation, the costs of compliance, and unintended consequences. For fossil-fuel technologies, taxes based upon their negative externalities may produce innovations to lessen their environmental impact (and therefore their tax burden). For emerging clean energy technologies, tax incentives can speed their adoption and permit investments in further innovation that might otherwise be impossible.
“Ecosystem of Innovation”
Having described some of the key ingredients of an environment primed for clean energy innovation, we believe it is worth noting the importance of bringing together these component parts. An important means to accomplish this is to create places where people collaborate and information is shared. Certain geographic regions throughout the world are noted for fostering close collaboration among research organizations, entrepreneurs, and capital providers, and for having conducive legal, regulatory, and tax environments. These ecosystems are not created overnight; they typically reflect the conscious efforts of government, nongovernmental organizations, businesses, and academia over a long period of time that are maintained through multiple economic cycles.
What RMI Is Doing to Further Innovation
RMI is taking steps to further innovation in each of the four aforementioned areas:
- As a leading global energy think tank, RMI creates research on a wide range of topics relevant to clean energy markets, including utility rate design, the economics of battery storage, the role of electric vehicles, and other areas.
- As a 35-year veteran of clean energy innovation, RMI has been an entrepreneur and a capital provider. This includes our incubation of the Hypercarconcept and subsequent spin off of Hypercar Inc. and its successor Fiberforge Corporation, which made composites for lightweight vehicles. It also includes our formation (and seed funding) of E Source and Black Bear Energy, two businesses that address gaps in specific segments of the clean energy markets.
- Although RMI is not an advocacy organization, RMI has assisted in the development of regulatory frameworks to promote sensible deployment of clean energy resources. Our electricity practice has supported regulatory structures that can further clean energy innovation, and our buildings practice advises on building codes and standards that allow breakthroughs in green design and engineering.
- As an independent, nonpartisan, not-for-profit, RMI has convened diverse participants to produce an ecosystem conductive to innovation. For example, our e–Lab Accelerator brings together teams to develop specific clean energy opportunities. For these meetings, we convene policymakers, business leaders, technologists, and other experts to help teams take their innovations to the next level.
At RMI, we are strong proponents of innovation in clean energy markets, and are actively trying to understand and map the innovation dividends associated with clean energy investments. We will continue to do what we can, within our own institution and in the broader environment in which we operate, to support the emerging technologies and business models that will allow us to realize a cleaner, more secure, and more prosperous future.
Image courtesy of iStock
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