States and Clean Energy Economic Development

Author: Lewis Milford, Clean Energy Group | Project: Clean Energy States Alliance

blogphoto-windmill-dollarFor the last decade, clean energy projects like wind, solar, and biomass have proliferated across the United States. While the federal government tax and incentive policies have played a key role, a little known but critical reason for the growth of the clean energy industry has been state clean energy funds. These clean energy funds, which have dedicated state funding now in over twenty states, are strategic public investors in thousands of these projects.  Their past success and future opportunity to be a partner with the federal government on job growth in clean energy should be the next chapter in states’ economic development strategy.

In the early years, and still in many states today, clean energy funds have been focused primarily on individual project financing and deployment.  But public state fund roles are changing with the growth of the clean energy industry.  Beyond investing in projects, some of these state funds are also taking on economic development activities within their states.

Along with project investment activity, some state funds now are focusing efforts on economic development activities to grow the industries that those renewable energy projects have spawned. These state-level activities include identifying supply chains renewable energy technologies and applications such as offshore wind, making equity investments in solar and wind companies, and developing industry clusters in areas such as modern energy storage companies. A few state funds also have been active in business incubation—providing working capital for expanding growth companies, public venture capital, and workforce training.

State public clean energy funds are in the perfect position to institute a new set of economic development strategies to create a clean energy economy. They have been the leading public investors in clean energy projects on the ground in the U.S. They have helped make it possible for the President of the United States to peg future job growth on an expanded clean energy economy.

But what is needed to grow these programs is a smarter, working relationship with the federal government. Washington D.C. agencies need to look at state funds not another constituency fighting for dollars, but as investment partners to grow the clean energy economy.

This is just the beginning of what will be several posts in the future about how the federal government and the states need to develop better partnerships on clean energy and economic development.  Clean Energy Group has written about how a new “clean energy federalism” could work (Innovation to Infrastructure: Clean Energy without Cap and Trade) and we are working on new ideas to make that a reality.

Turning Climate Tech Transfer on its Head

Authors: Lewis Milford, Jessica Morey, Clean Energy Group | Project: Clean Energy Innovation

CEG report cover may 2011This week we released a new report on global climate innovation – the lessons learned from global innovation initiatives in other areas to create new directions for climate technology innovation, especially in developing countries. The report, Moving Climate Innovation into the 21st Century: Emerging Lessons from other Sectors and Options for a New Climate Innovation Initiative, was based on in-depth research of nine case studies from around the world, and almost 100 hours of interviews with leading global experts.

We reached many conclusions but the most surprising is this: contrary to conventional wisdom, breakthroughs in climate technology are likely to come from developing countries. This view directly confronts prevailing notions that climate solutions will happen only with massive funding for ‘North to South’ technology transfer.

That is the international climate path now. The international community has been principally committed to meeting the climate technology needs of developing countries through technology transfer from the North to the South. It has then struggled to come up with ways to raise trillions of dollars to pay for that transfer.

The IPCC has broadly defined technology transfer to include “flows of know-how, experience and equipment” among a large range of stakeholders, without stipulating who transfers and who receives. However, the UNFCCC Articles and reports almost exclusively refer to tech transfer as a process whereby the rich world provides expensive technologies invented in the North to the South. As one UN report says “The focus of implementation has generally been on creating conditions in developing countries conducive to foreign investment and building capabilities to absorb and utilize imported technologies.”

Put simply, this conception of technology transfer relies heavily on official development assistance and posits developing countries as passive recipients of technology. Climate technology is then a one- way, conventional development aid strategy. And this conventional strategy will come at a huge cost – studies show that this form of transfer could cost trillions of dollars.

Our research in innovation theory and practical experience, however, shows that this thinking may be wrong – or at least other approaches are needed. That is because we believe many of the breakthroughs for low carbon technologies are likely to come from the developing world and then transferred to the West.

The conditions for climate technology innovation in the developing world are, surprisingly enough, far more conducive to the invention and scaling of new disruptive technologies than the OECD.

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

Reverse innovation means designing, creating, and manufacturing a product in a developing country. A global partner may work with a local company in most cases. The product may initially be designed to meet developing world demands for lower cost and different performance factors, 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, coined the term “reverse innovation” in the Harvard Business Review. The article describes two new medical devices—a $1,000 handheld electrocardiogram device and a $15,000 portable ultrasound machine—that were originally developed for markets in rural India and China. These radically cheap devices are now being sold in the US and Europe.

Immelt puts it bluntly that “If GE’s businesses are to survive and prosper in the next decade, they must become … adept at reverse innovation.”

And it is not just emerging economies that have innovative capacity to lead the way. As our case study on mobile phones shows, African and other developing countries are also developing innovations to transfer to the West.

Lighting Africa is one such example in the energy field. It is a very successful program through the World Bank and IFC that has led to the development of solar lighting retailing as low as US$22- before the program these products were hundreds of dollars more- beyond the reach of rural households without subsidies from development programs. These technologies are cheaper today because Lighting Africa through technology competitions and network creation was able to tap the creativity of African and international entrepreneurs to develop new products and business models.

Given these realities, the climate community should move away from the misleading term “tech transfer.” Let’s start talking about technology partnerships- where businesses, entrepreneurs and consumers in developing countries are not just passive recipients of technologies but active and creative problem solvers and indeed, initiators of innovation and technology development.

This is just not a change of terms. There are benefits for the rich world in these trends—through them we gain access to the developing world’s culture of frugality.

The rich world also needs cheaper climate technologies to meet the ambitious targets set by climate science and our governments. New technologies are up against powerful energy incumbent technologies—hampering our incentives to develop new technologies and build markets—and economic pressures are limiting the political will to pay for more expensive clean technologies. Many developing countries don’t have this industrial/infrastructure legacy.

Effective technology partnerships are a way to bridge the innovation needs of the rich and the poor. The developing world is focused on ultra-low cost “frugal innovation.” This is also just what the rich world needs for low-carbon technologies to compete against fossil fuel alternatives that must be replaced.

Finally, our report recommends that countries should quickly come together to begin to design an initiative to act as a catalyst for climate innovation in developing countries. If no entity has the job to do it, it won’t happen. New models and approaches are needed now more than ever.


This article was also featured on The Huffington Post.

Picking Nuclear, Picking a Winner?

Author: Lewis Milford, Clean Energy Group 

UCS report cover nuclear 2011In my recent post, I tried to counter the myth that the government should not be in the business of “picking winners,” a charge leveled against some recent Obama Administration energy proposals.

I tried to explain that government has always been in business of supporting technologies, especially new ones. I cited a study and might have been a bit academic. So it’s worth taking a real world example in the energy area to prove the point a bit stronger.

A recent report from the Union of Concerned Scientists details the aggressive federal government support for nuclear power going back over five decades. Whether you agree that was the right or wrong policy is not the point. The point is what the government did to “pick winners” in the nuclear energy area.

As the report noted, “historically, investment tax credits, accelerated depreciation, and other capital subsidies have been the dominant type of government support for the industry.” These subsidies have had the effect of significantly reducing the cost of electricity from nuclear power, ranging from 2 cents to 7 cents per kilowatt hour. This has made nuclear seem artificially cheap compared to alternatives. Also, the way that nuclear plants are approved and financed has generally shifted the costs of overruns and other financial risks to the public ratepayers, rather than to the private investors in the plants.

Perhaps the most stunning effect of these subsidies is their financial scope as compared to the amount of power the subsidies produced.

…subsidies to the nuclear fuel cycle have often exceeded the value of the power produced. This means that buying power on the open market and giving it away for free would have been less costly than subsidizing the construction and operation of nuclear power plants.

Those who argue against picking winners are really using the dog whistle to say “I don’t want to subsidize your preferred technology.”

An honest debate about what energy source to subsidize is useful. But that debate should not rely on any claim about picking winners, which has happened in energy for decades and it will continue to happen. So let’s shift the debate to more productive areas of argument.