The difficulties of energy R&D

Europe has set the wheels in motion for a green energy revolution. The European Commission’s Strategic Energy Technology (SET) Plan, launched in 2010, calls on governments and industry to invest €50 billion over the next ten years to pioneer breakthroughs in new energy technologies and speed the shift to a low carbon economy by 2020.

But unleashing a massive innovation in new energy technologies was never going to be easy for the EU – no matter how strong the political will. That’s because the paradigm for investing in energy research and development differs fundamentally from other sectors, such as semiconductors or pharmaceuticals.

Research and development in many tech sectors regularly produce new generations of products such as chips, cell phones or drugs that replace the existing set and provide a healthy return on investment. By contrast, change in the energy industry is slower, and the capital risks are higher.

Why? The dominant installed base of assets is dedicated to fossil fuel production and distribution, for which the marginal cost of supply creates a high hurdle to new innovators. As a result, the cost and challenge of building a portfolio of new low-carbon supplies is immense, and the uncertainty that new technologies will be adopted is greater.

Carbon capture and storage (CCS) is a good example: the costs for the first-of-a-kind commercial scale projects – like those being progressed for the EU demonstration phase – are high. And that is just the proving ground for the technology. New detailed policy and regulations are still required before it can be deployed at the necessary scale.

The International Energy Agency estimates a global annual R&D spending gap of between $9 billion and $18 billion on carbon capture and storage (CCS) technologies to achieve the 2050 target of reducing emissions by 50% over 2005 levels. Of 80 CCS projects identified in the IEA’s 2010 Report on Global Gaps in Clean Energy R&D, only one was proceeding to construction.

The difficulty of creating unique energy products also undercuts the market incentive to invest in low carbon technologies. While a semiconductor company will profit handsomely on a hot new computer chip packed with greater processing power at a lower price, energy companies deal with largely undifferentiated products – fuel and electricity. No matter how “green” the source of a new fuel, consumers may not want to pay more for it, or change their habits to use it.

Finally, government regulation plays a large role in markets and policy makers still need to lay the groundwork for an energy paradigm shift.

Given those different basic conditions for innovation in the energy sector, what are the right policies to speed new technologies to market?  Forging an efficient model for public-private partnerships is high on the list.  Under the SET Plan, the Commission promised a more flexible, “trust-based approach” to collaboration through industry-led public-private partnerships – the European Industrial Initiatives.

Until now, the partnership models designed by the Commission as it relates to energy have been cumbersome and inflexible -- a major disincentive for R&D executives intent on spending research budgets efficiently.

“It's vital that the EU has the right policies and partnerships in place,” says David Eyton, group head of research and technology at BP. “Companies like BP have a major role to play in delivering change, so we are committed to working with policy makers in developing an ecosystem that accelerates energy innovation and the deployment of new technologies.”

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A high-level Science|Business symposium 11 March in Brussels, “The Energy Difference,” brings together top researchers and policy experts to debate how best to accelerate innovation across a range of clean energy technologies – and how to get the incentives for public-private partnerships right.

The roundtable is supported by BP and hosted by the EU Representation of the German state of Baden-Württemberg and is the first of three high-level events planned for 2011. Follow-on events will focus on R&D for next-generation biofuels and meeting Europe’s 2020 goals in renewables.