Tyndall Briefing Note No.

3 December 2001

An Audit of UK Energy R&D: Options to Tackle Climate Change
Dr. Jim Watson and Alister Scott
Environment and Energy Programme SPRU – Science and Technology Policy Research University of Sussex, Falmer, East Sussex, BN1 9RF Tel. 01273 873539 Email w.j.watson@sussex.ac.uk

to identify lessons from past experience in the UK and abroad; and to set out some ideas for a balanced approach for R&D in the context of wider government programmes aimed at cleaner technology deployment

UK Energy R&D – A Dramatic Decline Public funding for energy R&D in the UK has declined dramatically over the past decade or so [3]. During the 1970s and 1980s, annual funding was typically several hundred million pounds. Funding has recently declined to around £50m per year or less, representing as little as 10% of the annual budgets of the late 1980s. Whilst this steep decline in public funding mirrors the trend in many other countries, the UK situation is particularly severe for two reasons. First, the magnitude of the decline is bigger than in any other member country of the International Energy Agency (IEA). Second, the UK budget is now comparable to that of EU Member States with smaller economies (e.g. Spain, Denmark and Norway) rather than the leading economies of France and Germany. Of course, the magnitude of a national R&D budgets is only a partial indicator of successful technological development. There are numerous examples of government R&D programmes that have failed to achieve their aims of new commercial energy technologies. Examples include the fast breeder nuclear reactor [4] and, more recently, US government efforts to develop advanced cleaner coal technologies for electricity generation [5]. It is often the case that these failures are a result of governments trying to create a market for a new technology where no demand exists – the upshot is that firms become dependent on government support, and there is little prospect of subsidy-free commercialisation. On the other hand, there is also a wealth of evidence from the UK and abroad that a critical mass of public support is necessary to maintain a viable skills base for new technology development. The idea that partly drove the fall in UK energy R&D expenditure – that governments should leave almost everything to the market – is equally flawed. Without government spending, the UK would not have been able to take a leading role in international climate change negotiations. UK carbon dioxide emissions have fallen significantly since 1990 as a result of the ‘dash for gas’, which saw the construction of a large number of highly efficient combined cycle gas turbine (CCGT) power
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Synopsis It is now widely accepted that global climate change presents a substantial threat to modern societies. According to the Royal Commission on Environmental Pollution, a 60% cut in greenhouse gas emissions is needed over the next 50 years to mitigate its impact. This cut cannot be achieved by making small changes to the current energy system. Radical change is required – change which must bring forward new infrastructures, new incentives and cleaner, more efficient patterns of energy use. The Cabinet Office review of energy policy is currently examining the long term issues facing the UK energy system. The decision by the Secretary of State for Trade and Industry to initiate a parallel review of public support for energy research and development (R&D) [1] is timely and welcome. Public funding for the development and deployment of low-carbon technologies has an essential role to play in the transition to a more sustainable energy system. The review provides an important opportunity to reappraise the rationale for public support for energy R&D, the form it should take and the priorities it should reflect. Based on a SPRU response to the DTI review [2], this briefing seeks: • • to review the evidence on the level of UK investment in energy R&D; to examine the rationale for public support of energy R&D;

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stations [6]. It is often argued that the CCGT is a privately developed technology that owes only a small debt to public R&D support. In reality, developments in CCGT efficiency and environmental performance have only been possible due to technology transferred from multi-billion dollar government development programmes for military jet engines. The Rationale for Public Support As the DTI has pointed out, a strong rationale for public funding of R&D in areas such as sustainable energy is that the potential social return is much larger than the private returns appropriable to individual companies. The DTI proposes that evidence of one or more market failures should be supplied in order to make a case for public support of a given technology (e.g. solar photovoltaics). As recent research on the economic benefits of publicly funded research shows, the market failure approach assumes that the creation of new information is the main benefit of public research [7]. In practice, public research creates many other important benefits, including: • • • • • • Training of personnel skilled graduates and other and

The market failure and linear approaches to investments in R&D also encourage policy-makers to focus too much attention on the problem of international free riders, where one country’s R&D becomes exploited by firms elsewhere. What this overlooks is that scientific or technical knowledge requires substantial capabilities on the part of the user. It also downplays the international nature of many R&D activities. To be able to innovate at the cutting edge, firms and countries need to invest in R&D so that they have the capabilities to make use of the latest international developments. This analysis suggests that, in addition to public sector investments, government policy should be explicitly aiming to encourage private-sector investments in R&D. Overall, UK industry in the energy sector seems to have a relatively poor record in such investments, and in bringing new energy technologies to market. Therefore it is currently in a weaker position to exploit public sector R&D undertaken in the UK and indeed elsewhere. The Value of Public Support – Lessons from the UK and Abroad As we have already suggested, there is substantial evidence that properly directed and thought-out public R&D can achieve significant results. One example is the Japanese R&D programme for solar photovoltaic (PV) technology, which commenced around 20 years ago. A recent evaluation of this programme has identified a consequent ‘virtuous cycle’ of private sector R&D funding (which has been consistently larger than the public budget) leading to an increase in installed capacity, production volumes and a reduction in unit price [8]. Although the market for PV technology is still largely underpinned by public subsidies, costs have fallen a long way (in Japan, a 95% fall in production costs occurred between 1974 and 1994). Furthermore, Japanese companies are now among the world leaders in this field. Another success story is US government support for R&D on large gas turbines. The US Department of Energy’s (DoE’s) Advanced Turbine Systems programme [9] has provided US suppliers with a competitive edge. The DoE has contributed part of the cost of technology development, university research and pre-commercial demonstration. The result is that US companies such as GE and Siemens Westinghouse now offer the most efficient (and cleanest) gas turbines in the world, with efficiencies of 60% in combined cycle mode. One of the first commercial plants is currently being constructed in Wales at Baglan Bay [10]. Closer to home, the UK new and renewable energy support programme has had some success. This consists of both an R&D programme and a market enablement mechanism for technology deployment, the Non-Fossil Fuel Obligation. The coupling of these two elements has been important for the success of the UK approach in bringing down the costs of a number of renewable energy technologies
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Supporting new professional networks stimulating cooperation and collaboration Expanding the problem solving Producing new methodologies Creation of new firms Provision of innovation. social knowledge relevant capacity for

technological and

instrumentation

to

All of the above benefits underpin innovation, but often in an intangible, complex and long-term manner. The simple ‘linear model’, where research is seen to produce economically useful information which firms then exploit, underestimates the benefits of public R&D by dwelling on the direct and more easily measurable contributions. One topical illustration of this has already been mentioned – the development and commercialisation of CCGT technology in the electricity industry. In addition to these benefits, public research creates three types of strategic value for the innovation process: • • Capability – creating the skills needed to take advantage of scientific information. Variety – helping to generate diverse options to counter the market’s tendency for path dependency and lock-in (i.e. the tendency for competing firms to home in on a limited set of technological options, making it increasingly costly for other options to be used). Capacity – a quantitative idea that combines capability and variety in an expression of the size of the investments needed to ensure high levels of innovation.

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[11]. Where it has been less successful is in accelerating deployment. Whilst some technologies such as onshore wind now need only very small subsidies, a cumbersome planning process has made deployment painfully slow, and a large proportion of renewable energy equipment is now imported. Is the Balance Right? Having made the case for public support, it is important to evaluate how limited government funds should be spent. In principle, it is essential that the government does not ‘pick winners’. A diverse portfolio of basic research, development, demonstration, and technologies should be supported to allow for the large uncertainties associated with future directions of technical change as well as rapidly shifting market conditions. It is, however, equally important that this need for diversity does not dilute public R&D effort because it is thought to be a good idea to do a bit of everything. The UK cannot compete with the USA and Japan in some areas (large gas turbines being a case in point). In others, there is enough evidence to suggest that commercialisation of a particular option is unlikely in the foreseeable future, whether government support is given or not. The classic technology that falls into the second category is nuclear fusion [12]. It is fascinating to observe how fusion has continued to attract large amounts of public subsidy in many countries despite a complete lack of commercial prospects. Since the mid-20th century, fusion has always been around 50 years away from commercialisation. Given this record, it is not clear why £38m is spent by the UK government each year on international fusion research – this is the same amount the DTI Energy Group spends on all other options put together. We argue that the same criteria that are used to judge R&D support for other energy technologies should be applied to nuclear fusion. What this implies is that, unless the overall level of public funding for energy R&D in the UK is very substantially raised, funding for fusion research should be cut to a much lower level. This would free up money for short and medium term prospects such as some renewables, system and network integration technologies, microgeneration technologies (e.g. micro turbines and fuel cells) and the evaluation of potential ‘wild cards’ like carbon sequestration. Overall, the level of public energy R&D support in the UK needs to be increased substantially. If the UK wishes to achieve and maintain a leading position in at least some technological areas, resources have to be made available by the government to leverage increased activity by the private sector. One possible approach would be to peg investment levels at similar per capita levels to those countries in the IEA that invest the most,
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although we recognise that this implies a substantial increase in funding. In addition to supporting expanded technology-specific R&D, this would also allow increased scope for research into appropriate policies and regulations for new technology deployment. Towards Cleaner Technology Deployment How can a future energy R&D portfolio be focused without at the same time running into the hazards associated with ‘picking winners’? The present practice of using the Foresight process to help set R&D priorities is one way of addressing this problem. Within these priorities, it is important that the full range of technology prospects is captured. At one end of the R&D spectrum, it is a good idea to require some industrial co-funding for technologies that are more applied and nearmarket. At the other, it is essential to reserve space for a substantial amount of ‘blue skies’ basic research for technologies with no immediate prospect of commercialisation. As the DTI has rightly acknowledged, public R&D support for cleaner energy technology options is of limited benefit if it does not lead to widespread deployment of new products. To some extent, the UK new and renewable energy programme has shown how essential it is to have a link to an appropriate deployment mechanism (in this case, the Non Fossil Fuel Obligation and the Renewables Obligation). In many discussions about new deployment programmes (recent examples include cleaner coal technologies and solar photovoltaics), there is a temptation for firms to see them as a vehicle for technology demonstration. Demonstration and deployment require different approaches. Demonstration produces results that are necessarily experimental and unreliable since the aim is to try out new techniques. Deployment requires the opposite – reliable technologies that can deliver environmental and commercial results. Deployment schemes like the Renewables Obligation are a bridge between R&D and full commercialisation. They provide transitional subsidies to compensate for market failures. For many renewable energy, cleaner fossil and demand side technologies that might contribute to the UK’s efforts to reduce greenhouse gases, it is this kind of deployment support that is required as much as basic R&D. Public support for R&D should be complemented by a range of other policy initiatives, similar to the market transformation approach adopted in policies aimed at certain sectors of the consumer goods markets. This can include signals about public procurement and the willingness to analyse and make alterations to the relevant regulatory frameworks. Conclusions This rather brief survey of the available evidence on public funding for energy R&D has highlighted a number of important points. These include:

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Public funding will play an essential role in bringing cleaner energy technologies to market – the private sector cannot complete this task alone; Public support for R&D has a wide range of benefits for innovation and market creation beyond the creation of new scientific and technological information; Future public energy R&D programmes can learn valuable lessons from past successes and failures at home and abroad; The challenge of climate change requires an overall expansion of public R&D funding; and

The funding portfolio should be targeted since the UK cannot compete in all technological areas, and it should retain space for ‘blue skies’ research on longer term prospects as well as near market technologies.

Finally, we have pointed out the key role of additional policies to deploy energy technologies that have been developed with the help of public R&D programmes. Without such policies, it will be extremely difficult for the UK energy system to achieve the radical change necessary to make a serious contribution to climate change mitigation.

Notes [1] We use R&D as a shorthand for research, development and demonstration throughout this briefing. [2] The DTI Review of Energy Research and Development was launched in October 2001. See http://www.dti.gov.uk/renewable/erag_review.htm. A full version of the SPRU response is available from the authors. [3] International Energy Agency Energy Policies of IEA Countries: 2000 Review (OECD/IEA 2000). [4] O Keck ‘A Theory of White Elephants: Asymmetric Information in Government Support for Technology’ Research Policy Vol. 17 (1988) p187. [5] J Watson et al. The Transfer of Cleaner Coal Technologies to China: A UK Perspective Report No. COAL R196, Department of Trade and Industry (August 2000). [6] WJ Watson Constructing Success in the Electric Power Industry: Combined Cycle Gas Turbines and Fluidised Beds DPhil Thesis SPRU, University of Sussex (1997). [7] A. Scott, G. Steyn, et al. (2001). The Economic Returns to Basic Research and the Benefits of UniversityIndustry Relationships: A literature review and update of findings. Report for the UK Office of Science and Technology. Brighton, SPRU, November. [8] C Watanabe, K Wakabayashi and T Miyazawa ‘Industrial Dynamism and the Creation of a “Virtuous Cycle” Between R&D, Market Growth and Price Reduction: The Case of Photovoltaic Power Generation Development in Japan’ Technovation Vol.20 (2000) pp299-312. [9] Details are available at http://fossil.energy.gov/coal_power/turbines/index.shtml. [10] J Watson ‘Holy Grail at Baglan Bay’ Supplement to Financial Times Energy Economist (September 1999). [11] SPRU Evaluation of the DTI New and Renewable Energy Programme 1994-8 Confidential Report to the DTI (1999). [12] For a historical review of fusion R&D, see J Clark and G MacKerron ‘Great Expectations: A Review of Nuclear Fusion Research’ Energy Policy Vol 17, No.1 (1989) p49 © Copyright 2001, Tyndall Centre.
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Tyndall Briefing Note No. 3

December 2001