Clean Energy Innovation

Learning from Best Practices in Business

Innovation theory and practice in non-energy sectors and from the business literature provide emerging trends in how companies are accelerating innovation. CEG advocates that the public sector should learn from these experiences to craft effective innovation strategies for clean energy technologies.  Our thinking in this space is founded in emerging innovation economics theory.

From Pricing to Innovation Economics[i]

The economic theories that having been driving policy-making in low-carbon innovation over the past few decades come mainly out of neoclassical theories. Whether “supply-side neoclassical” or Keynsian “liberal neoclassical,” these theories have led policy makers to rely on pricing as the dominant solution to clean energy innovation. “Just get the pricing right through raising the price of fossil fuels (cap and trade) and the markets will respond accordingly to develop the needed low carbon technologies.”

Innovation Economics, in contrast, suggests that these pricing only approaches will be insufficient to produce the scale and scope of technology innovation that climate recovery demands.

Instead, innovation economics argues for a more engaged government role to expressly adopt innovation policies that focus on institutions and the linkages between them. They tend to encourage new private and public partnerships. Innovation economists suggest that price has much less to do with innovation than factors such as a firm’s capacity, or the path dependency of the technologies involved, or government policies in favor of the competition (in this case fossil fuels), or the role of workers, research institutions and networks. This thinking is based on the view that neoclassical innovation theory is just that – too much theory, and not sufficiently based on the real world way in which actors in an economy actually operate.

Innovation economics would call for direct climate innovation policies, to encourage cost reductions, information sharing, technology transfer and institutional reform, all the elements needed to move low carbon technology into the commercial marketplace.

New Trends in Innovation Practice

Within this historical and academic context, there are new practical trends in innovation from the real world of companies and business schools that focus on a study of technology innovation as a process to be learned, analyzed, copied and adopted in the marketplace.

Innovation Systems

Innovation systems, also called  “value chain” analysis, is a process that describes a series of sequential activities where at each step in the process, the product passing through this chain of activities gains some value. In this approach, one would look at the deficiencies in the clean energy value chain – from production, to manufacturing, to distribution, to financing—to understand where improvements and public interventions are required to bring about needed innovations to reduce costs and get products to full market deployment- this is the approach that CEG takes in its analysis and why we promote public sector interventions all along the clean energy product development chain.

Disruptive Innovation

The theory of “disruptive innovation” was popularized by Harvard Business School Professor Clayton Christensen in his book “The Innovator’s Dilemma” in the mid-1990s. Under his theory, innovative technologies rarely find success by entering directly into mainstream markets or by competing on price or performance. Early success usually occurs in niche markets where the fundamental characteristics of the application are “suited to the merits” of the technology. Technologies then often develop from the fringes to overtake the conventional technology. The theory is used to explain the evolution of technologies as diverse as transistor radios, motor scooters, disk drives and steel manufacturing.

According to this theory new energy technologies will have a difficult time competing against commodity grid power without significant subsidies. Thus, the Clean Energy Group has learned from disruptive innovation to look for appropriate niche markets for new clean energy technologies- such as using fuels cells and other clean energy technologies for emergency first responders back-up power or remote telecommunications towers and focusing on applications of new clean energy technologies in the developing world not now served by the grid.            

Reverse Innovation

One of the most compelling and surprising new innovation trends is called “reverse innovation,” sometimes called “frugal innovation.” This trend is far removed from purely academic theory. Rather, it is now an operating strategy for major global corporations doing business in the developing world, with implications for how climate technology could develop.

Put simply, reverse innovation means designing, creating and manufacturing a product in a developing world country. The product may initially be designed to meet developing world demands for lower cost, as well as different performance and other characteristics. But global companies now use this “bottom of the pyramid” market strategy to create products that are later exported to the developed world.

Jeffrey Immelt, the CEO of General Electric, and his co-authors at Tuck Business School at Dartmouth who coined the term “reverse innovation,” argue that reverse innovation will become more and more common and by consequence, technology transfer increasingly will be South to North and South to South.

It is not just new products, but new business models, which will likely come from emerging markets. We at CEG believe that it is inevitable that this process will be applied to low cost climate technologies. The emergence of China as a preeminent manufacturer and exporter of low carbon technologies seems just the beginning of this emerging reverse innovation trend throughout the developing world.

Open and Distributed Innovation

Distributed and open innovation (DI) refers to the process of linking numerous people with disparate expertise working in different institutions and countries, to accelerate the deployment of a specific technology. The business literature defines DI as “the process of managing innovation both within and across networks of organizations that have come together to co-design, co-produce and co-service the needs of customers.” [ii]

At the firm level, “Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.”[iii] 

In describing this “open innovation” strategy, it is important to avoid some misconceptions. Some have confused “open innovation”—which is essentially a way to “tap the global brain”—with “open source” software or research development. While they share a philosophical approach, they are quite different in practice. Open source typically means communal development of a free good—for example, software that has been placed in the Internet commons for anyone to program and improve. There is no proprietary ownership of the product; anyone can download it and use it for free. In contrast, open innovation is a process of developing products using internal and external sources, but within a proprietary framework—products are still protected through patents or licensing and are not free to the world. It is the process of collaboration that is “open” in both senses, but the products of the process are treated quite differently.

DI has evolved in response to the changing economic and information landscape of the 21^st century —knowledge is widely distributed, workers are more mobile, funding can come from venture capitalists outside an organization, and, because of the internet, creativity can be quickly tapped from experts around the planet.            

The central idea behind open innovation is that in this new era companies- and we argue public organizations - cannot afford to rely entirely on their own research or resources.

Sun Microsystems co-founder, Bill Joy, put it perhaps the most succinctly when he framed it this way— "No matter who you are, most of the smartest people work for someone else.”[iv]

 [i] Much of the analysis here on economic theories of innovation is based on a excellent paper by the US based Information Technology and Innovation Foundation paper by Atkinson and Hackler, “Economic Doctrines and Approaches to Climate Change Policy,” (2010). ITIF.

 [ii] Dooley L., O'Sullivan D. (2007) "Managing within distributed innovation networks". International Journal of Innovation Management, 11 (3):397.

 [iii]Chesbrough, H.W. (2003) Open Innovation: The new imperative for creating and profiting from technology. Boston: Harvard Business School Press. p. xxiv.

 [iv] Lakhani KR, Panetta JA. (Summer 2007) "The Principles of Distributed Innovation". MIT Press: Innovations: Technology, Governance, Globalization 2 (3):2.