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BROOKINGS POLICY BRIEF
| February 2009
Energy Discovery-Innovation Institutes: AStep toward America’s Energy Sustainability
 James Duderstadt, Gary Was, Robert McGrath, Mark Muro, Michael Corradini, Linda Katehi,Rick Shangraw , and Andrea Sarzynski
The need to renew America’s economy, foster its energy security, and respond to global climate change compels thetransformation of U.S. energy policy. Innovation and its commercialization must move to the center of national reform.Not only must a broad range of carbon pricing and regulatory responses be adopted, but major increases in federal R&Dare essential along with the deployment of bold new research paradigms. To that end, the federal government shouldestablish a national network of regionally-based
energy discovery-innovation institutes
(e-DIIs) to serve as the hubs ofa distributed research network linking the nation’s best scientists, engineers, and facilities. Through such a network, thenation could at once increase its current inadequate energy R&D effort and complement existing resources with a newresearch paradigm that would join the unique capabilities of America’s research universities to those of corporate R&Dand federal laboratories.
America’s Challenge
Massive sustainability and security challenges plaguethe nation’s energy production and delivery system.Transformational innovation and commercialization willbe required to address these challenges. However, currentinnovation efforts remain inadequate to ensure the devel-opment and deployment of clean energy technologies andprocesses. States and localities lack the wherewithal tomake the needed investments. Additionally, numerous mar-
ket failures prevent private rms from investing sufcientlyin clean energy. Because rms cannot capture all the ben
-
ets of their innovative activity, they under invest and focus
on short-term, low-risk research and product development.
Limitations of Existing Federal Policy
Federal energy efforts, meanwhile, suffer from two keyshortcomings. First, the federal government spends lessthan 1 percent of its R&D budget on energy—a level less than
one-fth of expenditures in the 1970s and 1980s—clearlyinsufcient in light of coming challenges. Beyond that, fed
-eral energy efforts are also based on an obsolete researchparadigm. Most federal energy research is conducted within“siloed” labs that are too far removed from the market-place and too focused on their existing portfolios to support“transformational” or “use-inspired” research targeted atnew energy technologies and processes.
A New Federal Approach
The federal government should create a national networkof several dozen e-DIIs. An interagency process shouldestablish the network and competitively award core federalsupport of up to $200 million per year for each major e-DIIoperated by university or national laboratory consortia,along with funding for smaller e-DIIs and distributed energynetworks connected to the large e-DII “hubs.” Federal fund-ing would be augmented with participation by industry,investors, universities, and state governments, for a totalfederal commitment growing to roughly $6 billion per year(or 25 percent of a recommended total federal energy R&Dgoal of $20 to $30 billion per year). The e-DIIs would:
n
 
Foster partnerships to pursue cutting-edge, applica-tions-oriented research among multiple participantsand disciplines
 
n
 
Develop and rapidly transfer highly innovative tech-nologies
into the marketplace
n
 
Build the knowledge base and human capital 
necessaryto address the nation’s energy challenges
n
 
Encourage regional economic development
by spawning
clusters of nearby start-up rms, private research organi
-zations, suppliers, and other complementary groups andbusinesses
 
2
BROOKINGS
| February 2009
America’s Challenge
Today’s energy challenges stem from an unsustainable energy infrastructure,
 largely dependent on fossil fuels characterized by unacceptable environmental impact and supplyconstraints, with clear implications for America’s economic health, national security, and ecologicalsustainability. Addressing these challenges will require a wide range of pricing and regulatory inter-ventions as well as major investments in energy infrastructure and the demonstration and deploy-ment of clean new technologies. But success will also require substantial—and creative—investments
in clean and efcient energy technology, much of which has yet to be developed. That means that
innovation and its rapid commercialization must move to the center of U.S. energy policy.
Sustainability and security challenges plague the world’s energy production and delivery sys-tem.
The global economy currently relies on fossil fuels for nearly 85 percent of its energy. By 2030,
global energy use is projected to grow by 50 percent over 2005 levels. At the same time, recentanalyses of world petroleum production, knownreserves, and the impact of rapidly developingeconomies suggest that an increasing imbal-ance between supply and demand will drive upglobal oil and gas prices, placing the nation’seconomy and security at risk. While the worldhas substantial reserves of other fossil-fuel resources, such as coal, tar sands, and oil shale, the min-ing, processing, and burning of these fossil fuels with current technologies is expensive and charac-terized by increasingly unacceptable environmental impact in light of climate change concerns andintensive land and water utilization.
Transformative innovation will be required to address fundamental energy challenges.
As warnsJohn Holdren, the new White House science advisor, the multiplicity of challenges that arise at theintersection of energy with the economy, the environment, and national security–led by excessivedependence on petroleum and the dangerous consequences of energy’s environmental impact,particularly global climate change–requires a major acceleration of energy-technology innovation.Over time, such a push can transcend the limitations of existing energy options, bring new optionsto fruition, and reduce the tensions among energy-policy objectives so as to enable faster progresson the most critical ones.Immediate impact can be achieved from adopting existing technologies and practices that improve
the efciency of energy utilization, bringing fuel savings and creating new jobs. Yet, large and sus
-
tained efciency investments will not be enough to achieve global sustainability goals. New technol
-ogies and practices are needed to mitigate the harmful impact and resource constraints of existingenergy sources. Of longer term importance is the deployment of affordable, carbon-free renewableenergy technologies, which will require energy storage technologies and an expanded electricity
The global economy currently relies on fossil fuels for nearly 85 percent of its energy. By 2030,global energy use is projected to grow by 50 percent over 2005 levels.
 
3
BLUEPRINT FOR AMERICAN PROSPERITY
grid. With today’s renewable technologies, a substantial gap remains in achieving the scale and coststructures necessary for major impact.And here, increased energy R&D is needed to generate new technologies, demonstrate them on acommercial scale, and rapidly deploy them into the marketplace.
In the United States, investments in energy innovation remain inadequate to overcome mul-tiple market and government failures that hinder problem-solving.
The market and governmentproblems are serious. To begin with, energy prices—in the absence of national price interventionsand notwithstanding several oil price spikes over the past 40 years—have remained generally low
enough that there has been little incentive for companies to invest in clean and efcient energytechnologies and processes. Similarly, the reality of spillover benets means that individual rmscan rarely capture all of the benets of their innovative activity, which also leads to underinvest
-ment and a focus on short-term, low-risk research and product development. Uncertainty and insuf-
cient information on energy pricing, policy, and the features of new technology or processes may
further delay innovation. Finally, neither state nor local governments—for many of the same reasonsas well as the limitations of their budgetary capacity—are likely to step in at the scale needed.In view of this, and despite the scale and urgency of the nation’s energy challenges, neither large
industrial rms nor the federal government have regarded energy research as a high priority for
several decades. Today’s investment inenergy R&D by the federal government and
large industrial rms is only one-fth thelevel of the early 1980s, making up just 1.1
percent of the nation’s total R&D investmentand 0.03 percent of the nation’s GDP.Other U.S. technology-intensive industriesspend comparatively more on R&D than theenergy sector. If the federal government
and large industrial rms together were
to invest 2 percent of the nation’s annualenergy sales in R&D (as the health careand agricultural sectors do), they would beinvesting $25 billion in energy R&D—morethan six times current levels. With currentspending levels, we cannot expect to see theinnovative activity necessary to develop anddeploy new technology, create new jobs, andboost economic growth.
$0$2,000$4,000$6,000$8,000$10,000$12,000$14,000$16,000$18,000$20,000
   1   9   7   3   1   9   7  4   1   9   7   5   1   9   7  6   1   9   7   7   1   9   7   8   1   9   7   9   1   9   8   0   1   9   8   1   1   9   8   2   1   9   8   3   1   9   8  4   1   9   8   5   1   9   8  6   1   9   8   7   1   9   8   8   1   9   8   9   1   9   9   0   1   9   9   1   1   9   9   2   1   9   9   3   1   9   9  4   1   9   9   5   1   9   9  6   1   9   9   7   1   9   9   8   1   9   9   9   2   0   0   0   2   0   0   1   2   0   0   2   2   0   0   3
   R   &   D   E  x  p  e  n   d   i   t  u  r  e  s   (  m   i   l   l   i  o  n  s ,  c  o  n  s   t  a  n   t   2   0   0   8   $   )
0.00%0.05%0.10%0.15%0.20%0.25%
   R   &   D  a  s   S   h  a  r  e  o   f   U .   S .   G   D   P
Federal + Large Industrial Energy R&DEnergy R&D as share of GDP
The federal government’s and large industrial rms’ spending on energy
R&D grew rapidly in the late 1970s and has since fallen off
Sources: National Science Foundation, Industrial Research and Development Survey; “Researchand Development in Industry;” and “Federal R&D Spending by Budget Function.”
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