The Breakthrough Institute

By Michael Shellenberger and Ted Nordhaus

The double digit growth of clean tech industries like solar and wind can't last, and climate legislation in Congress won't continue the momentum, according to a new Breakthrough Institute analysis made for a keynote speech at the Cleantech Group's February 2010 conference in San Francisco.

The rapid growth of renewable energy over the last few years will be difficult to maintain politically as solar and wind achieve a larger share of the energy market. If the U.S. were to maintain its production tax credit (PTC) subsidy for wind power to become 20 percent of America's energy generation, the cost would be $20 billion per year. Moreover, existing transmission is rapidly meeting capacity, which will push wind and solar into sites with higher load management, storage, and transmission costs.

Climate legislation currently being considered in Congress would do little to help the clean tech industry. Cap and trade legislation that passed the House would provide a .8 - 1.5 cent/kwh subsidy to renewables in contrast to the current 2.1 cent/kwh subsidy from the PTC, the 2 - 4 cents/kwh subsidy the Chinese government provides to wind, the 36 - 51 cents/kwh the Germans provide to solar, and the 11 - 17 cents/kwh the Chinese provide to solar.

To the extent clean tech thrives, it will do so in China, Japan and South Korea, which will collectively invest $509 billion to America's $172 billion over the next five years.
While clean tech entrepreneurs may profit in the short-term, long-term growth of clean tech require breakthroughs that make clean energy as cheap as coal. Experts agree that breakthroughs are needed for solar panels so that they more efficiently convert sunlight into electricity, for biofuels to be cheaply grown without intensive fossil fuel inputs, and for batteries to store more energy in smaller amounts of space. For nuclear plants to become much cheaper they will likely need to be smaller, mass manufactured, proliferation-proof, and need to store their own waste.

Thus, improving the efficiency of solar panels, improving the energy density of electric batteries and fuel cells, developing cellulosic bio-fuels, and solving the design and materials challenges associated with the mass manufacture of small, self contained nuclear plants are clear technical challenges that clean energy research, development, and deployment efforts must focus upon.

Such efforts must be led by the public sector for several reasons. First, private funding of R&D is unusually low in the energy sector, worldwide. By contrast, in those high tech sectors where federal investment in innovation is higher, so too is private sector funding. In the U.S., pharmaceutical firms invest 20 percent, information technology 15 percent, and semiconductors 16 percent, whereas energy firms invest 0.23% in R&D. U.S. public sector health R&D investment today levels out at $30 billion per year, and private sector investment is nearly twice that.

Second, the high cost of energy generation -- as compared to say, software development -- requires public funding. This problem is compounded by the fact that private firms and investors fear that energy technologies will be reverse-engineered and their value will be lost due to knowledge spill-over. This spill-over fear thus reduces the first-mover advantages that private firms would otherwise expect.

History bears out the conclusion that barriers to private sector development of new energy technologies - high capital costs, low end-use product differentiation, limited first-mover advantage, low cost, widely deployed incumbent technologies - are too high to overcome. Indeed, virtually every existing low carbon technology was developed by the public, not the private sector.

Every nation that has had any success decarbonizing its energy supply has done so through supply-side, direct, technology specific strategies. France and Sweden have decarbonized more than any other nation through public deployment of nuclear power and hydro. The biggest driver of solar PV price declines has been German feed-in tariffs -- which are now being scaled back due to public concern about high subsides. The same has been the case with commercial scale wind power in Denmark. By contrast, Europe's Emissions Trading Scheme (ETS) and other price and market based policies have failed to drive substantial development or deployment of clean energy technologies, despite creating a much-touted "price on carbon."

Present low-carbon energy deployment strategies assume that greater economies of scale will drive big cost reductions, but the historical record suggest that this is less the case than normally assumed. Past cost reductions have typically been more a result of ongoing R&D and design improvements than scale. Public deployment strategies thus need to be tightly integrated with R&D efforts in order to overcome key technical challenge and achieve substantial cost reductions.

Governments should thus treat deployment as a strategy for accelerating cost-reductions, not reducing emissions, since the latter would require subsidy levels that governments and publics have shown little willingness to support. Driving cost reductions must be the explicit purpose and primary design of deployment policies and achieving consistent reductions in the unsubsidized cost of clean energy technologies must be the metric that rationalizes deployment investments.