Michael Pollitt Cambridge Judge Business School WhysubsidiseR+D250114.pdf · 1 Why and How to subsidise Energy R+D? Michael Pollitt Cambridge Judge Business School IEB Barcelona 28

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Why and How to subsidise Energy R+D?

Michael Pollitt

Cambridge Judge Business School

IEB Barcelona

28 January 2014


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Outline

• Economists and Research and Development

• R+D, innovation and productivity in theory

• Empirical evidence on R+D and market reform

• Historical context of energy innovation

• What to do about supporting energy R+D?

• Conclusions and future directions for research


3

ECONOMISTS AND RESEARCH AND DEVELOPMENT


4

Economists, energy R+D and innovation

• Requests for subsidies should be questioned, are usually self-interested and beget more subsidy.

• Sector specific R+D is a scarce input which needs to be economised, with high opportunity costs within total R+D expenditure.

• Innovation is an intermediate output, and not obviously good itself.

• Ultimate ‘good’ outputs of innovation are lower cost or higher quality goods (and possibly variety per se). Quality may be security and environment but also ease of use.

• Opportunity costs are pervasive in R+D and energy R+D subsidy exceptionalism is a costly idea.

• Energy, per se, is a low productivity growth sector, but an important intermediate input.

• Innovation might be promoted in other ways such as by positive incentives on desirable output or negative incentives on undesirable outputs.


5

Economists, energy R+D and innovation

• Much energy investment (and innovation) wasted in expensive new technologies for nuclear, storage etc (Cohen and Noll, 1971; Henderson, 1977; Green, 1994).

• But much cheaper ‘adjacent possible’ Kauffman (2003) very important in energy.

• Raising the productivity of R+D expenditure is a key objective, never just about more expenditure (Economists economise!).

• Looking for institutional arrangements which do this is important.

• Who pays for energy R+D is important in efficiency and distributional terms.

– Not clear it should be energy consuming industries, especially where environmental benefits are shared by whole of society.

– Not clear distributionally fair to pay for subsidies via tax on household energy consumption.

– The burden of marginal cost of innovation on current generation is higher than future. generations.


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Energy R+D in context

• Total Global Fossil Fuel subsidies, 2012:

– $544bn (World Energy Outlook 2013)

• Total Renewable Energy Subsidies, 2012:

– $100bn (World Energy Outlook 2013)

• Total Industrial Energy R+D, 2012:

– $15.7bn (Battelle R+D funding forecast 2013)

• Total OECD Government Energy R+D, 2011:

– $18.6bn (IEA Statistics)


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R+D, INNOVATION AND PRODUCTIVITY IN THEORY


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R+D in Stages of Development for renewables

Source: Grubb et al., 2008, p.335.


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Role of learning investment

Source: Grubb et al., 2008, p.338.


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Learning by doing high, but Learning by research significant...

Technology

Learning-by-

doing rate:

Two-factor curves

Learning-by-

doing rate:

Single-factor curves

1 Pulverised fuel supercritical coal 3.75% 4.8%

2 Coal conventional technology 13.39% 15.1%

3 Lignite conventional technology 5.67% 7.8%

4 Combined cycle gas turbines (1980–1989) 2.20% 2.8%

Combined cycle gas turbines (1990–1998) 0.65% 3.3%

5 Large hydro 1.96% 2.9%

6 Combined heat and power 0.23% 2.1%

7 Small hydro 0.48% 2.8%

8 Waste to electricity 41.5% 57.9%

9 Nuclear light water reactor 37.6% 53.2%

10 Wind – onshore 13.1% 15.7%

11 Solar thermal power 2.2% 22.5%

12 Wind – offshore 1.0% 8.3%

NOTE SCALE OF EXISTING CAPACITY Source: Jamasb and Kohler in Grubb et al., 2008, p. 324, Table 12.1: Learning-by-doing rates using single-

and two-factor curves

Q: How much do costs fall as capacity doubles?


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Directed Technical Change (Acemoglu et al, 2012)

• Path dependency in technological innovation.

• Subsidising ‘clean’ inputs vs ‘dirty’ inputs may shift

technical change on to a different pathway.

• This may involve shifting scientists from working on

dirty technologies to clean ones.

• This may be cheaper in the long run than directly

supporting existing clean technologies.


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Typology of Innovation (Bauer, 2012, p.16)


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Enabling conditions (Bauer, 2012, p.17)


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R+D in Multi-level innovation system?

Geels, 2004, p.915.


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Regulation can promote innovation directly

• This relies on induced R+D.

• Examples: CAFÉ standards for US automobiles (of

course don’t quite understand if this is in

comparison with EU) e.g. Lee et al. (2011).

– Clean Air Acts (1970, 1977, 1990)

– National Low Emission Vehicle Program (1997)

• Stringent standards do spur innovation.


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But regulation can limit innovation

• Price regulation seems to limit regulation in the

telecoms sector (Bauer and Shim, 2012).

• Regulation directs innnovation in particular

directions (e.g. renewables).

• This may be away from better sources of

innovation (e.g. tariffs and demand response).

• Government failure is pervasive in energy…


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EMPIRICAL EVIDENCE ON R+D AND ENERGY MARKET REFORM


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Electricity Sector Liberalisation: key elements

KEY REFORM STEPS

Ownership

- Privatising the existing businesses

- Allowing new private actors

Structure

- Vertical unbundling of the sector into G, T, D, S

- Horizontal splitting of businesses into several units

- Allowing new entry into generation and supply markets

Markets

- Establishing competitive wholesale markets

- Competition in the retail markets

Regulatory & Governance

- Establishing an independent regulator

- Incentive regulation of T/D networks

- Provision of network access to existing and new actors

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Total R&D Spending & Patents - US

0

2

4

6

8

10

12

14

0

50

100

150

200

250

1975 1980 1985 1990 1995 2000

Ener

gy R

&D

(Bill

ions

199

6$)

Pate

nts

Gra

nted

Year

PatentsGranted

Funds forEnergy R&D

Source: from Margolis & Kammen (1999).

Nemet and Kammen (2007) make argument true at technology level, and

declines relative to other sectors. Also evidence of recovery 2000-05.


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Government R&D Spending

Source: IEA

0 1000 2000 3000 4000 5000 6000

Canada

France

Germany

Italy

Japan

Netherlands

Spain

Switzerland

United Kingdom

United States

Government Energy R+D (2012 mUSD)

2010 2005 2000* 1995 1990


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The tale of liberalisation and R+D in the UK…

0

100

200

300

400

500

600

700

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

£ m

illio

ns (

2008 p

rices)

Total othertechnologies orresearch

Other power andstorage techs(includetransmission anddistribution)Hydrogen andfuels cells

Renewableenergy sources

Fossils fuels

Energy Efficiency

Figure 2: Government energy R&D in the UK - Main categories

Source: IEA Energy R&D sistics database

From Jamasb and Pollitt, 2011.


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R+D by generation and transmission declines…

0

50

100

150

200

250

300

350

400

450

£ m

illi

on

s (2

00

8 p

rice

s) R&D spending (transmission,

i.e. NGC)

R&D spending (generation)

Dissolution of the CEGB

Figure 4: R&D spending in the UK major generation and transmission companies[

Source: Surrey (1996), CEGB and NGC Annual Reports and Accounts, BIS R&D Scoreboard



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R+D by distribution increases from low base…

0

2

4

6

8

10

12

14

£ m

illi

on

s (2

00

8 p

ric

es)

R&D spending

IFI initiative

[i]

Figure 5: R&D spending in the UK distribution utilities

Source: Ofgem (2007), EC Electric (2009)



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Patenting by generation companies initially stable…

0

50

100

150

200

250

195

8

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

UK Atomic Energy Authority

Others (Electricity Council and EA

Technology)

Distribution and transmission

companies

Nuclear generation companies

Generation companies (excluding

nuclear)

Figure 6: Patents applications from main UK ESI actors, by type (1958-2009) From Jamasb and Pollitt, 2011.


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Patents from transmission and distribution low…

0

2

4

6

8

10

12

14

16

195

8

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

patents

applications from

distribution and

transmission

companies

Figure 8: Patent applications from main UK distribution and transmission companies From Jamasb and Pollitt, 2011.


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However, total electricity patents absolutely unaffected…

0

50

100

150

200

250

3001

95

8

196

0

196

2

196

4

196

6

196

8

197

0

197

2

197

4

197

6

197

8

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

patents

applications,

electricity

from fossil

fuels &

equipment

patents

applications,

renewable

energy

technologies

Figure 9: UK Electricity related patents applications, keywords search results



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And also total electricity patents relatively unaffected…

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

0,9

1,01958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

perc

en

tag

e s

hare

(%

)

electricity related UKpatents as percentageof all published UKpatents

Figure 10: Electricity related UK patents publications (UK or EPO or WIPO application with UK priority number) as % of total UK patents publications. From Jamasb and Pollitt, 2011.


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R+D and energy market reforms Summary Evidence (Jamasb and Pollitt, 2008) - I

• Public R&D spending - decline before & after

reform

• Restructuring - Negative size (vertical &

horizontal) effect and diseconomies of

vertical separation

• Competition - Negative effect of short-

termism and uncertainty


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R+D and energy market reforms Summary Evidence - II

• Privatisation - Negative effect of short-termism & leverage

• Mergers: – Negative effect of geog. dispersed & horizontal

mergers

– Positive effect of vertical mergers (?)

• Organisational learning capacity - made irrelevant or lost in the processes

• Shift of focus - from basic research to application and commercialisation


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R+D and energy market reforms Summary Evidence - III

• Public-private R&D complementarity -

Negative effect

• Internal-external R&D complementarity -

Negative effect

• Internal & intra-firm competition for resources

- Negative effect


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General problems with measurement

• Patents, licenses and publications measure different

aspects of innovation output (Nelson, 2009).

• May need combinations of measurements to get a true

picture of who is innovating, the significance of

innovation and when innovation is occurring.

• Difficult to define what innovation is occuring due to

obliteration and symbolic adoption. R+D subsidies

suffer from relabeling problem.


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HISTORICAL CONTEXT OF ENERGY INNOVATION


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Putting Energy Liberalisation in historical context (see Pollitt, 2012)

• Fouquet and Pearson (2006) examine the price of lighting

services from the 1300s to 2000 in England and Wales.

– The technology of production changes significantly: it changes from

candle power, to kerosene, to gaslight and finally to electricity.

– In 2000 the real price per lumen was 1/3000 what it had been in 1800.

– The demand for lighting (lumens per capita) had risen 6500 times.

– Technological progress substantial, R+D unsubsidised.

• Key issue for liberalisation – its impact on longer run

technological progress. Clearly, the impact on this could

significantly outweigh the short run impact on efficiency.

• Note: Renewable subsidies substantially worsen TFP in

electricity, even if long run impact positive.


34

Putting Energy Liberalisation in historical context

• Millward (2010) reviews the history of public and private ownership in

utility sectors in the western world over the period c.1830 to 2000. He

notes that the period of public ownership in the post-World War 2

period was characterised by rapid productivity growth and that ‘there

is no evidence that privatisation raised productivity’ (p.17).

• Problems with the argument:

– Millward’s basic counterfactual is that TFP growth should have

been the same between 1950-73 and the later period 1973-95.

– TFP trend is a suspect measure to look for performance

impacts of liberalisation. If revenue is falling due to increased

competition or regulation then falling input growth (due to

efficiency) may be offset by falling revenue growth and TFP may

appear to grow slowly, when efficiency is accelerating.

– environmental benefits need to be accounted for in any

assessment of liberalisation (Newbery and Pollitt, 1997 in SCBA).


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WHAT TO DO ABOUT SUPPORTING ENERGY R+D?


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Institutions for rapid economic progress (Nelson, 2008)

• Distinguish ‘physical’ technology and ‘social’ technology

• Example of delivering a recipe as distinct from tools to make

food.

• Old social technologies may not be appropriate and need to be

replaced by new ones.

• Institutions important to enable new developments.

• The ‘fundamental uncertainty’ of innovation is why it needs to

be supported.

• Only a small number of sectors drive productivity in any

historical period.

• A mixture of private and public actions required, but public

actions can be wrong ones.

• Basically rapid progress is clearly not about the money spent

on R+D…


37

Institutions for rapid economic progress (Nelson, 2008)

• Very difficult to evaluate institutional structures

• Off line and on-line learning. Off line learning easy

with physical technologies but difficult with ‘social’

technologies. Need institutions to promote

innovation in social technologies around energy.

• Multiplicity innovation types require different types

of institutions (Bauer, 2012).

• This suggests high returns to social innovation

and importance of large number of experiments…


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Ways of supporting innovation (Bauer, 2012, p.29)

• Separate innovation funds

• Ex post prizes for innovation (see Scotchmer, 2006)

• Variations in regulated return for innovative projects

• Different tax treatment of R+D expenditure

• Unbundling of local access


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Recent UK changes to UK energy regulation

Source: Ofgem City Briefing, July

2010, p.28.


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Institution for social innovation: Low carbon networks fund

• 2010-2015 price control

• ‘up to £500m to support projects sponsored by the Distribution

Network Operators (DNOs) to try out new technology, operating

and commercial arrangements’

• ‘The aim of the projects is to help all DNOs understand how they

can provide security of supply at value for money as Britain moves

to a low carbon economy.’

• First Tier allows DNOs to recover a proportion of expenditure

incurred on small scale projects.

• Second Tier annual competition evaluated by panel of experts of up

to £64 million to help fund a small number of flagship projects.

• We will be monitoring the learning that emerges from these

projects in order to understand its impact on the current regulatory

framework.

https://www.ofgem.gov.uk/electricity/distribution-networks/network-innovation/low-carbon-network-fund/first-tier-projects

https://www.ofgem.gov.uk/electricity/distribution-networks/network-innovation/low-carbon-network-fund/second-tier-projects


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Low carbon networks fund effects

• Setting up of ‘Future Networks’ units

• Collaborative Tier 2 projects, including suppliers,

academics, OEMs and software solutions providers.

• Examples:

– Low Carbon London

• http://innovation.ukpowernetworks.co.uk/innovation/en/Projects/ti

er-2-projects/Low-Carbon-London-%28LCL%29/

– Customer Led Network Revolution

• http://www.networkrevolution.co.uk/

– Flexible Plug and Play

• http://innovation.ukpowernetworks.co.uk/innovation/en/Projects/ti

er-2-projects/Flexible-Plug-and-Play-%28FPP%29/


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CONCLUSIONS AND FUTURE DIRECTIONS FOR RESEARCH


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Concluding thoughts

• Directed technical change is important and subsidised

R+D is one way to achieve this.

• R+D in energy did decline, but partly recovered,

however this in itself is not the issue.

• R+D in energy does, probably, require support in the

face of price regulation and unbundling.

• R+D in energy needs to pay attention to ‘social

technology’ given relative innovation in Mbits vs MWhs

and path dependency of existing systems.

• In economics, it is never about the size of subsidy.


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Innovation in what?

• In governance and payment arrangements in

energy?

• In the use of information from smart grids and

smart meters?

• In policy making in the face of rising complexity of

regulatory decision making.


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Some social science research gaps on energy R+D?

• Measurement of innovative outputs in energy, and link

between innovation and productivity.

• Identification of institutions of energy R+D appropriate

to particular countries.

• Promotion of innovation collaboration and competition

at same time between energy companies across

supply chain.

• In the EU, how best to coordinate public energy R+D

across countries.

• How energy R+D subsidies distort overall R+D and

the co-benefits of subsidised R+D for society?

• Distribution of payments for energy R+D.


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Bibliography

• Acemoglu, D., Aghion, P., Bursztyn, L. and Hemous, D. (2012), ‘The Environment and Directed Technical Change’, American Economic Review, 102 (1): 131-166.

• Bauer, J.M. (2012), Designing Regulation to Support Innovation: Experiences and Future Challenges, CRNI Conference November 30, 2012.

• Bauer, J.M. and Shim, W. (2012), Regulation and Innovation in Telecommunications, Quello Center Working Paper 01-2012.

• Cohen, L.R. and Noll, R.G. (1971), The Technology Pork Barrel, Washington D.C.: Brookings Institute.

• Fouquet, R. and Pearson, P.J.G. (2006), Seven Centuries of Energy Services: The Price and Use of Light in the United Kingdom (1300-2000), Energy Journal, 27(1):139-177.

• Geels, F.W. (2004), ‘From sectoral systems of innovation to socio-technical systems: Insights about dynamics and change from sociology and institutional theory’, Research Policy, 33 (6-7) : 897-920.

• Green, R. (1994), ‘The Cost of Nuclear Power Compared with Alternaties to the Magnox Programme’, Oxford Economic Papers, Vol. 47, No. 3 (Jul., 1995), pp. 513-524.

• Grubb, M., Jamasb, T. and Pollitt, M. (2008) (eds.), Delivering a Low Carbon Electricity System, Cambridge: CUP.

• Henderson, P.D. (1977), ‘Two British Errors: Their Probable Size and Some Possible Lessons’, Oxford Economic Papers, Vol. 29, No. 2 (Jul., 1977), pp. 159-205.

• Jamasb, T. and Kohler, J. (2008), ‘Learning Curves for energy technologies: a critical assessment’, in Grubb et al., pp.314-332.

• Jamasb, T.J. and Pollitt, M.G. (2008), ‘Liberalisation and R&D in Network Industries: The Case of the Electricity Industry’, Research Policy 37 (6-7), pp.995-1008.

• Jamasb, T. and Pollitt, M. (2011), ‘Electricity Sector Liberalisation and Innovation: An Analysis of the UK Patenting Activities’, Research Policy, Vol.40, No.2, pp.309-324.

• Kauffman, S.A. (1993), The Origins of Order: Self Organization and Selection in Evolution, New York: Oxford University Press.

• Lee, J., Veloso, F.M., Hounshell, D.A. (2011), ‘Linking induced technological change and environmental regulation: Evidence from patenting in the U.S. auto industry’, Research Policy, 40: 1240-1252.

• Margolis, R.M. and Kammen, D.M. (1999), ‘Underinvestment: The Energy Technology and R+D policy challenge’, Science, Vol.285, 30 July, pp.690-2.

• Millward, R. (2010), Public Enterprise in the Modern Western World: An Historical Analysis, Milan European Economy Workshop, University of Milan, Italy, Working Paper 2010-26.

• Nelson, A.J. (2009), ‘Measuring knowledge spillovers: What patents, licenses and publications reveal about innovation’, Research Policy, 38: 994-1005.

• Nelson, R.R. (2008), ‘What enables rapid economic progress: What are the needed institutions?’, Research Policy, 37: 1-11.

• Nemet, G.F. and Kammen, D.M. (2007), ‘U.S. energy research and development: Declining investment, increasing need, and the feasibility of expansion’, Energy Policy, 35(1): 746-755.

• Newbery, D. and Pollitt, M. (1997), ‘Restructuring and Privatisation of the CEGB: was it worth it?’, Journal of Industrial Economics, Vol.45(3): 269-304.

• Pollitt, M. (2012), ‘The Role of Policy in Energy Transitions: Lessons from the Energy Liberalisation Era’, Energy Policy, 50, Nov: 128-137.

• Scotchmer, S. (2006), Innovation and Incentives, Cambridge MA: MIT Press.

Documents

Michael Pollitt Cambridge Judge Business School WhysubsidiseR+D250114.pdf · 1 Why and How to subsidise Energy R+D? Michael Pollitt Cambridge Judge Business School IEB Barcelona 28