The renaissance of energy innovation

Jim Skea is Professor of Sustainable Energy at Imperial College London and Research Councils UK Energy Strategy Fellow. In the latter role, he is preparing a prospectus for energy research and training needs for Research Councils UK and assessing the effectiveness of energy innovation systems internationally. He has particular research interests in energy, climate change and technological innovation. He is a member of the UK's Committee on Climate Change and Vice-Chair of IPCC Working Group III. He was formerly Research Director of the UK Energy Research Centre.

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Until recently, energy had all the characteristics of a mature sector. Technological innovation in production and conversion processes was proceeding incrementally and cost competition (where competition existed) defined the market for undifferentiated products and services. Sources such as the EU's R&D scoreboard¹ show that most energy companies invest relatively little of their income in R&D compared with those operating in other sectors.

Today, the situation is changing. New technologies such as wind and solar are entering the market and developments in the ‘smart grid’ arena may transform relationships between energy producers and consumers. The innovation process has long been viewed as a ‘black box’.² However, partial indicators, including the deployment of new technologies (an outcome indicator) and R&D expenditure (an input indicator) suggest that there is a lot of activity inside the energy black box. If resources are to be expended wisely, there is a need to understand better how the energy innovation process works and how it can be managed effectively.

Fig. 1 (ref. 3) shows public sector investment in energy research, development and demonstration (RD&D) in International Energy Agency (IEA) countries going back to the 1970s. After a surge associated with the response to the oil crises, expenditure fell between the mid-1980s and the year 2000 before growing once again. Public investment in energy RD&D is now back to 1970s levels. Due to the anomalous impact of the US Recovery and Reinvestment Act, 2009 marked an all-time high in energy RD&D investment. The fact that the recent trend in expenditure has been upward, in spite of the economic recession, is striking. Nevertheless, the proportion of GDP expended on energy RD&D has fallen by a factor of almost three since its peak in 1980.

Fig. 1 Investment in energy RD&D in IEA countries. Sources: IEA, BP.

The make-up of the energy RD&D portfolio has also changed. Although nuclear RD&D still accounts for the largest share, it now represents only a quarter of energy RD&D compared to over 70% in the 1970s. RD&D related to renewable energy and energy efficiency has grown in importance.

Two factors have reinvigorated the innovation process. Since 2000, rising import dependence associated with concerns about energy security has been a major driver. Imports of oil by developed countries, much of it from the Middle East, have returned to 1970s levels. Developed countries are now also in competition for supplies with rapidly emerging Asian economies. Fig. 1 superimposes world crude oil prices⁴ on the RD&D trends. While the correlation is remarkable, caution is needed in attributing causality. High and volatile oil prices, which now fluctuate around $100 per barrel compared to around $20 per barrel in the 1990s, are associated with tightness in global oil supplies and large currency movements needed to finance imports. These factors have undoubtedly influenced policymakers.

Global trade in natural gas and coal has also grown rapidly. While shipped supplies of liquefied natural gas (LNG) and coal are generally considered to be sufficiently diverse as not to raise security concerns, the movement of gas through a small number of pipelines, especially on the Eurasian landmass, gives rise to greater security concerns.

Climate change is the second reason that governments' interest in the energy sector has grown. In Cancun in 2010, governments agreed that deep cuts in global greenhouse gas emissions (GHGs) are required with a view to holding the increase in global average temperature to 2 °C above pre-industrial levels. They aim to conclude a comprehensive global agreement by the end of 2015. The IEA has argued that a ‘technological transformation’ of the energy system would be needed if this goal is to be achieved, entailing a significant up-scaling of RD&D efforts. The performance of current technologies will not allow the global climate target to be met.⁵ According to the IEA, the investments needs associated with achieving the 2 °C target are $36 trillion higher between now and 2050 than would be the case under a business-as-usual scenario. Decarbonising electricity would absorb much of that investment, requiring RD&D in renewables, nuclear and carbon capture and storage (CCS). There are also significant RD&D needs in the transport sector. In the short term, energy efficiency could play a large and cost-effective role in decarbonisation. The precise volume of RD&D spend required is hard to judge but the IEA argues that even a doubling of current levels of investment may not be enough.⁶

There are many synergies between the energy security and climate change drivers. In particular, renewables and energy efficiency help meet both policy needs.

While energy security and climate change help to explain governments' revived interest in energy RD&D, it would be wrong to gloss over the role of emerging scientific opportunities. The synergy between policy drivers and scientific opportunity appears to underlie current trends.

Developments in three areas of science are being parachuted into the energy sector and creating transformative opportunities. First, the biological sciences have created opportunities for crop improvement and the more efficient conversion of crops for energy purposes. By processing lignocellulosic material from crops such as miscanthus or willow, energy yields can be improved and substantial reductions in GHG emissions achieved in comparison to conventional fossil fuels. The ‘sustainability’ of advanced biofuels in terms of land and water use and the full lifecycle impact on GHG emissions are still hotly debated, but it is clear that R&D is securing major advances compared to the use of food crops, such as corn, for first generation biofuels.

The second major input, which is pervasive across the energy sector, comes from the material sciences. The ability to ‘design’ as opposed to ‘discover’ new materials, assisted by modelling at the atomic level, has multiple applications. Improvements in manufacturing processes associated with new materials, e.g. for semi-conductors and flat-screen televisions, have also found application in the energy world. The most transformative applications are in relation to ‘electrochemical’ technologies such as photovoltaics, fuel cells, batteries and other forms of energy storage. Improved materials will also help in a range of other areas ranging from nuclear reactor design to blades for very large wind turbines.

Information and communication technologies (ICT) constitute the third area which, once again, is pervasive in its impact. Advances in supercomputing have enabled the atomic level modelling associated with the materials sciences. ICT also enables the development of ‘smart grids’, an ill-defined concept which nevertheless covers a range of real issues including the integration of large volumes of intermittent renewable energy into electricity systems and the integration of the actions of all users, including consumers, attached to an electricity system.

Advances in the underpinning science also create new opportunities in applied energy science and engineering. For example, engineers who previously worked on coal conversion and combustion can now apply their skills in the bioenergy field. Those improving wind and offshore renewable technologies can take advantage of the availability of materials with enhanced properties to build larger and more reliable devices.

So far, this article has addressed public sector RD&D. Energy research conducted by the private sector is much harder to evaluate due to the relative absence of statistical data. There are also definitional problems which mean that the comparison of public and private sector R&D statistics must always be indicative.

To understand the private sector role, it is necessary to understand the particular role of oil within energy markets. After the oil crises of the 1970s, there were strong market and policy pressures to move away from oil where alternative fuels were available. Coal and gas substituted for oil in industry while nuclear and coal (and later natural gas) replaced oil in electricity generation. Oil use is now largely restricted to its core market as a transport fuel where its high energy density gives it a huge advantage. In 1974, only 45% of the oil products used for energy purposes (as opposed to chemical feedstocks) in IEA countries went into transport. By 2011, this proportion had risen to 77%.

The distinct nature of the transport-oil nexus vis-a-vis the rest of the energy sector is reflected in the pattern of public/private R&D expenditure. Table 1 shows that public sector investment in fossil fuel RD&D was about $2 bn in IEA countries in 2011. Drilling down, just over half this went on CCS motivated by the climate change agenda. Of the remainder, 60% went on oil and gas research but this was concentrated in a very small number of countries: Japan, which hosts no major oil companies; Canada; France; and Norway.

Table 1 Public sector energy RD&D spend in IEA countries 2011 ($ bn)^a

Area	Spend
a Source: IEA.
Energy efficiency	3.1
Fossil fuels	1.8
Renewable energy	3.7
Nuclear	4.4
Hydrogen and fuel cells	0.7
Power and storage	0.9
Cross-cutting	2.6

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The US and the UK, which are home to some of the largest oil majors in the developed world (Shell, BP, Chevron, ExxonMobil), report next to no public expenditure on oil and gas RD&D. On the other hand, the R&D spend of these four companies alone was €3.5 bn in 2011,⁷ almost twice the public sector spend in all OECD countries on fossil fuel RD&D. Adding all of the oil and gas producers headquartered in IEA countries brings the total up to €6.5 bn (Table 2) and, if major oil servicing and equipment companies are added, to $9.5 bn. This is almost a factor five higher than public spend. Furthermore, a small group of non-OECD oil and gas producers led by PetroChina, Petroleo Brasiliero and Gazprom virtually match the spend of the OECD-based companies. Altogether, companies with oil and gas interests allocated around $16 bn to R&D in 2011, comparable to the total public sector RD&D spend on all energy technologies in IEA countries. Although oil and gas companies spend large sums on R&D, this needs to be put in the context of their size. On average, oil and gas producers spend 0.2% of their revenue on R&D.

Table 2 Industry R&D spend among the 1500 top R&D companies 2011 ($ bn)^a

Sector	OECD	Non-OECD	TOTAL
a Source: Joint Research Centre.
Oil & gas producers	6.5	6.1	12.6
Oil equipment, services & distribution	3.0	0.3	3.3
Electricity	3.3	0.0	3.3
Gas, water & multi-utilities	1.3	0.1	1.4
Alternative energy	1.0	0.0	1.0

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While companies in the electricity sector spend 0.6% of their revenue on R&D, the $3.3 bn is highly concentrated in a small number of companies. Between them, two French companies (EDF and AREVA) plus Korea Electric Power account for just over half this sum, much of which is likely to be focused on nuclear R&D. There appears to be a broad balance between public sector and industrial R&D spend in the nuclear arena.

Business spent about $1 bn on R&D on ‘alternative energy’ in 2011. This is most closely aligned with public research on ‘renewable energy’ and ‘hydrogen and fuel cells’. Most forms of alternative energy are less mature and have yet to achieve cost parity with traditional forms of energy. The alternative technologies that have received the greatest support from business, such as wind and PV, have already achieved widespread deployment. Support for these technologies tends to come from specialised companies (e.g. Vestas) and diversified engineering companies rather than traditional energy companies. For less mature technologies, the public sector has been the major driver.

It is difficult to track private sector R&D over time. The available data suggests that oil and gas producers have increased their spend since 2004, especially national oil companies in emerging economies such as China and Brazil. There is no clear picture for utilities, with some company budgets expanding while others have contracted.⁸

In many areas of R&D relevant to energy, the business contribution is hard to identify. On the energy supply side outside oil and gas, the locus of much R&D is in diversified engineering companies and equipment suppliers (e.g. Siemens, General Electric) where it is hard to attribute expenditure to energy or to other sectors such as transportation. Attributing expenditure specifically to energy is even more difficult in other demand sectors where energy efficiency is just one product attribute to be considered. This applies particularly in the motor vehicle sector where Toyota, for example, is the world's largest investor in R&D (over $10 bn in 2011). It also applies in the construction sector and in the manufacture of appliances and electronic equipment. The latter sector is very R&D intensive (over 5% of revenue) and the total R&D expenditure of $50 bn vastly exceeds the $3 bn spent on energy efficiency RD&D by the public sector in IEA countries.

The literature on innovation demonstrates that when existing technological regimes are threatened by game-changing innovations, one way that incumbents can respond is by innovating in ways that defend the existing regime. Steam versus sailing ships is a classic example from the recent innovation literature.⁹ One way of interpreting current patterns of R&D investment is to see an effort to transform energy in the long-term on the part of governments balanced by business-led efforts that strengthen the existing energy paradigm. Public policy concerns are driving R&D that aims to transform the current energy system. The desire to reinforce the current system leads on the other hand to R&D that expands the resource base and reduces the cost of existing energy sources. Some types of R&D investment, e.g. in CCS, act as a potential bridge between the ‘new’ and ‘old’ regimes. The increased use of public-partnerships in R&D support may help to reduce these tensions, but they are real nevertheless.

Differences in the focus of R&D reflect perceptions about the future of energy. Current energy scenarios fall into two broad types. ‘Normative’ scenarios tend to be driven by climate change considerations, starting with the objective of keeping global average temperature increases to below 2 °C above pre-industrial levels and deriving the patterns of technology deployment needed to achieve the goal. The IEA ‘two degrees’ (2DS) scenario¹⁰ falls into this category. Oil companies such as BP¹¹ and ExxonMobil¹² tend to produce ‘projections’, a single view of how they believe energy is likely to develop. Similarly, Shell produces a number of scenarios that ‘explore’ different ways that the energy system might develop in the context of wider social and economic trends.¹³ Normative scenarios inevitably envisage a more rapid adoption of energy efficiency, renewable energy and other low carbon technologies.

Where does this divergence between different hopes and expectations about the energy future leave innovation? Public policy concerns are driving R&D that aims to transform the current energy system. The desire to reinforce the current system leads on the other hand to R&D that expands the resource base and reduces the cost of existing energy sources.

It might be argued that ‘game-changers’ such as shale gas in the Unites States and a greater degree of energy autonomy will lead to the slackening of public policy pressures. However, the abundance of fossil fuels will not remove the public policy imperative for decarbonisation and more transformational energy system change. The current tension between the desires for paradigm change/reinforcement may not be resolved for decades, sustaining the current creative tension that is stimulating innovation.

Furthermore, most of the low-carbon technologies deployed in, for example, the IEA 2DS scenario also appear in the oil industry scenarios. The difference is that they are deployed more slowly and to a lesser extent. For example, there is hybridisation of motor vehicles but not full electrification. This suggests that public support for a range of less mature low-carbon technologies is robust against a range of outcomes.

Finally, the level of funding going into energy RD&D raises important questions as to whether investments are leading to productive outcomes. R&D prioritisation techniques and processes, as well as the ‘fitness for purpose’ of institutional arrangements for commissioning and links between the public and private sectors, are attracting renewed attention in many countries.

There are divergent views in the literature as to the best strategy for energy innovation. One view is that governments are not well placed to ‘pick winners’ and should apply technology neutral policies promoting the public good (e.g. a carbon tax) while providing more generalised support for R&D on the basis that the private sector is better placed to identify and develop technologies with potential.¹⁴ The alternative view is that the main problem with energy innovation lies in the ‘valley of death’ between research and commercial deployment. Viewed from this perspective, targeted support from the public sector is required to achieve economies of scale and learning-by-doing.¹⁵

The energy sector in its current stage of development, given the interplay between public policy and the commercial interests of incumbents and new entrants, provides a rich domain in which to investigate how technology develops in the context of pressing public policy needs. With that in mind, Research Councils UK is currently funding research at Imperial College London to explore energy innovation processes. Following the production of a ‘research prospectus’ for university-based energy research in the UK, the research team will undertake international comparisons to assess the effectiveness of energy innovation systems on a wider canvas. Given the renaissance of energy innovation, there are important lessons to be learned and significant gains in the effectiveness of public policy to be realised.

References

1. Joint Research Centre, The 2012 EU Industrial R&D Investment Scoreboard, EU Joint Research Centre, ISBN 978-92-79-27647-7,  DOI:10.2791/30423, 2012.
2. N. Rosenberg, Inside the black box: technology and economics, Cambridge University Press, 1982.
3. International Energy Agency, Energy Technology Research and Development Database (Edition: 2013), Mimas, University of Manchester, 2013,  DOI:10.5257/iea/et/2013.
4. BP, Statistical Review of World Energy, 2013, http://www.bp.com/content/dam/bp/pdf/statistical-review/statistical_review_of_world_energy_2013.pdf.
5. International Energy Agency, Energy Technology Perspectives 2012, IEA, Paris, 2012.
6. International Energy Agency, Energy Technology Perspectives 2008, IEA, Paris, 2008, p. 187.
7. Joint Research Centre, The 2012 EU Industrial R&D Investment Scoreboard, EU Joint Research Centre, ISBN 978-92-79-27647-7,  DOI:10.2791/30423, 2012.
8. Joint Research Centre, The 2012 EU Industrial R&D Investment Scoreboard, EU Joint Research Centre, ISBN 978-92-79-27647-7,  DOI:10.2791/30423, 2012.
9. F. W. Geels, Technological transitions and systems innovations, Edward Elgar, Cheltenham, 2005.
10. International Energy Agency, World Energy Outlook 2012, Paris, 2012.
11. BP, Energy Outlook 2030, London, 2013, http://www.bp.com/en/global/corporate/about-bp/statistical-review-of-world-energy-2013/energy-outlook-2030.html.
12. ExxonMobil, Outlook for Energy: A View to 2040, 2013, http://www.exxonmobil.com/Corporate/energy_outlook_view.aspx.
13. Shell, New Lens Scenarios, London, 2013, http://www.shell.com/global/future-energy/scenarios/new-lens-scenarios.html.
14. D. Helm, The Carbon Crunch: How We're Getting Climate Change Wrong - and How to Fix it, Yale University Press, New Haven, 2012.
15. R. Gross, et al., On picking winners: The need for targeted support for renewable energy, ICEPT/WP/2012/013, Imperial College Centre for Energy Policy and Technology, London, October 2012.

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