How to Speed Up Energy Innovation

Energy is the problem of our time, says Rebecca Henderson

Published: Aug 19, 2010

Is there a special sauce for stimulating innovation in the energy sector, a concoction to spur cost-effective developments toward solving the climate change problem?

HBS professor Rebecca Henderson doesn't claim to know all the ingredients for that special sauce. But as someone who has spent a career studying technological change, Henderson has observed trends and common traits across a variety of industries.

And her message is optimistic. Moving to clean energy "is not hopeless at all. We've hardly started to invest in energy innovation."

In a forthcoming book to be published by the National Bureau of Economic Research in association with the University of Chicago Press, Accelerating Innovation in Energy: Insights from Multiple Sectors, Henderson and coauthor Richard G. Newell explore the histories of innovation in four sectors of the U.S. economy that have experienced enormous change and growth: agriculture, chemicals, life sciences, and information technology.

By examining the intersecting roles played by the federal government, public policy, and the private sector to encourage innovation in these industries, the authors establish a clearer pathway to what it will take to drive the magnitude of change needed in the field of energy.

Julia Hanna: What drew you to focus on the field of clean energy?
Rebecca Henderson: The enormity of the challenge. We have before us the seemingly impossible task of taking about 80 percent of the carbon out of the energy system in 40 years. I don't know much about energy, although I know much more now than I did when I started this project. But I've spent my life studying innovation, so I thought maybe I could be of some help. I believe energy is the problem of our time. I have a hard time focusing on anything else.

Q: Can you talk a bit about the rationale behind using insights from other sectors to accelerate innovation in energy?
Part of the idea is to bring attention to industries that have experienced radical transformation at great speed, which is just what we need in energy. For example, 100 years ago, half the country worked in agriculture. Now almost no one does. Agriculture has also seen a massive increase in productivity. Some of that is due to mechanization and the use of fossil fuels. But much of it is due to innovation in the breeding of plants and animals, as well as fertilizers and new techniques. There's a huge amount of human capital and knowledge invested in farming.

Q: What sets energy apart from these other industries?
The first and most obvious is that it's difficult to differentiate energy as a product at the delivery point. It just looks like electrons or gas in the tank. The striking thing about these other sectors is that they invented new things that met new customer needs, or existing needs in different ways. Whereas with energy, what we're looking for is basically the same product but produced in a much cleaner way.

Another difference is the sheer size of the industry. Telecom is now of comparable size by some measures but certainly wasn't initially. Before the Second World War there was no information technology industry. That's an important difference when you consider the amount of capital that will be required to green the energy system—it's very large by the standards of the early years of the other industries we consider. With that said, it's not a large amount by modern standards. Annual capital investment in telecom is roughly the same order of magnitude as capital investment in energy.

The third and last difference is that with the exception of agriculture, all the other industries we consider were moving into empty spaces. An IT industry? There was no IT industry. Biotechnology? It didn't exist.

So, it's a commodity product that can't be differentiated, the sector already exists, and the change needs to happen at enormous scale.

Q: So why take the trouble to consider the other sectors if they're so different?
They're the best examples we have of innovation at the speed and order of magnitude that is needed in energy. So the trick is to try and learn from the other sectors while being very much aware of the degree to which what we learn does or does not translate to energy.

Q: What do you see as the most pressing change needed to drive clean energy innovation?
We need to have a price for carbon. Simply trying to improve rates of innovation without simultaneously creating demand for low-carbon energy is unlikely, in my opinion, to have much of an effect. We can pour money into nifty energy technologies, but if there's no demand that's not a sustainable solution. Aggressive regulation such that everyone had to reduce and use less carbon-based energy would certainly be helpful. However, my preference would be for a carbon tax or some kind of cap-and-trade regime. We do have the beginnings of that in the renewable portfolio standard approach.

With that said, one of the things that I think can be learned by looking at these other sectors is that it's very unlikely that one can pick the winning technology in advance. The lovely thing about a price for low-carbon energy is that it's technology neutral. It tells innovators what we want, and lets them explore the many different ways to get there. That seems to be a much more flexible and effective way of supporting innovation.

Q: Can you talk a bit about the other sectors and how they relate to clean energy innovation?
In many ways, agriculture is the closest to energy. It's completely pervasive, and it's fundamental to the economy. Rates of innovation in agriculture have been enormous, as I mentioned, and were significantly driven by public investment. There was a centralized approach to investment in the science of the field, but innovation also occurred through agricultural extension stations where you could try things out on the ground. There are a number of proposals to do something like that in energy, which is particularly interesting in areas like conservation.

Biotech and pharma are more dependent on patents than energy is likely to be; but one of the most important things we learned from looking at this sector is the power of collaboration between the public and private sectors. We know that if you can build what the authors of that chapter call an innovative ecosystem, it appears to really accelerate innovation in very productive ways.

What's striking about energy innovation to date is that a lot of it has been channeled through government labs. And although those labs have a lot of smart and thoughtful people, they're often remote from industrial centers and not tightly linked to local ecosystems. And so one of the implications of biotech and pharma is that you'd want to tie these labs more to major industrial centers and universities.

A common touch point for all of these industries is the importance of training human capital. Historically very few people have gone into energy. It was viewed as a sideline, as something that hasn't been exciting or fun or innovative. In biotech and pharma, you see the very important role that federal funding of universities plays in training the next generation of the workforce. We need to do something like that in energy.

IT and telecom are similar to energy in that they're both infrastructural and large scale, with investments made overwhelmingly by the private sector. Also, IT was an industry kick-started by the Department of Defense. In his chapter on the history of the Internet, Shane Greenstein examines the role of the federal government and the iterative process that DARPA engaged in to develop what would become the Internet. So it's an example of how major infrastructural investments can be triggered by federal engagement in very productive ways.

The chemicals industry is really the outlier in the set because much of the innovation there was conducted in the private sector. Like energy, however, it's about building infrastructure. The similarities between a chemical plant and a large power plant are quite strong. Coming back to innovation, what's striking about chemicals is the role of small, independent engineering firms in transmitting innovation across the industry. So there's an interesting model here: Could we imagine building a sector like that in energy, where much of the innovation is held by design-build construction firms? I don't think we know the answer to that, but it's interesting to consider what sort of policies in the areas of procurement, IP, and antitrust legislation would support that level of activity.

Q: The book cites Germany and California as examples of how public policy can create demand for low-carbon energy.
Yes, you can certainly subsidize clean energy, as the Germans and Californians did with a solar feed-in tariff. As I mentioned, the danger with that kind of policy is that it may not be the most efficient way to achieve innovation. If that's what is politically possible, it's much better than nothing. The massive investments by California and parts of Europe have had the effect of halving the price of solar photovoltaics, which is a major achievement. But it's quite expensive.

Q: Sometimes it seems that there's a certain sense of hopelessness around climate change and making a major shift to clean energy.
Technically, it's not hopeless at all. We've hardly started to invest in energy innovation. That's one of the reasons I wanted to do this project—because I thought there was enormous hope given what we'd accomplished in other sectors. We know what to do. Establish a price for carbon, invest money in R&D, manage the money well, and we'll see enormous change very quickly.

[This article was provided with permission from Harvard Business School Working Knowledge.]

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