Energy innovation - why subsidies matter

Activism is starting to drive energy innovation policy

The impacts of climate change on the daily lives of global citizens is driving greater activism, public awareness and in line with this shift in public perception, addressing climate change is moving to the centre of policy for governments.  

New forms of energy, and embedding these effectively into the energy system, are key to combating climate change, and so funds are being committed to energy innovation policies, resulting in some big announcements about subsidies, grants and funding for energy and climate change.  Most of this funding comes from re-allocation of government spend towards the increasing priority of addressing climate change, and some from additional taxes and levies.

While reducing energy demand and improving energy efficiency are seen as essential (not least as it does not change the fundamentals of the hydro-carbon based current system and therefore is less disruptive), these will not be sufficient and the UK needs new forms of secure energy supplies for families and businesses. The question then is, where will this innovation come from, and how will subsidies help?

Energy subsidies and level playing fields

In August, France and the UK became the third and fourth countries to pledge to double their contribution to the Green Climate Fund set up by the UN.

In addition, in September,  the UK has said that up to £1bn (€1.13bn) in aid funding will be made available for climate change innovation through the UK’s newly established Ayrton Fund, named for Hartha Ayrton, a British suffragette and scientist.   (Ayrton was the first woman elected to membership of the Institution of Electrical Engineers in 1899 and pioneered work on electric arcs.)

The Ayrton Fund is designed to assist UK scientists and business innovators in developing innovative new technologies for use in the developing world to reduce greenhouse gas emissions and to alleviate the impacts of climate change.

Within the UK, the Government’s Energy Catapult, part of Innovate UK, is funding a stream of energy innovation programmes including batteries, renewables, and energy systems. The UK Government has committed around GBP 400m per annum to energy innovation.

The International Energy Agency (IEA) has calculated that global subsidies to aid the deployment of renewable energy technologies amounted to US$140 billion in 2016. To no-one’s surprise, they note that countries within the Organisation for Economic Co-operation and Development (OECD) subsidise green energy more than lower income, non-OECD countries.

Far more surprising is their finding that while renewables are often criticised for being heavily subsidised, fossil fuels and nuclear power receive more financial support than renewable energy. The IEA calculated that fossil fuels received about US$260 billion in 2016 and the United Nations Framework Convention on Climate Change (UNFCCC) has criticised these subsidies for hampering progress on reducing emissions. 

There are also hidden subsidies to fossil fuels, for example the price of power generated by fossil fuels does not reflect the environmental costs they generate in the form of climate change and local air pollution.   These hidden subsidies are a significant obstacle for entrepreneurs to develop competitive new innovative energy forms able to meet demand for clean, affordable, secure energy, and integrate into the existing energy system. 

Historical energy innovation

A wealth of innovations and inventions have helped keep the world’s lights on and factories running, with an acceleration in the last two centuries.

But how many of these are down to government intervention? Let’s look at some energy innovations:  

1835 - Light Bulb - James Lindsay of Scotland. In 1869 a commercially viable light bulb was invented by Johnathan Swan of Newcastle, whose invention was marketed by Edison.

1839 - Hydrogen fuel cell - William Grove of Swansea (he also invented sputtering, now finding a use in nano-technology)

1865 - Fracking - Edward Roberts, an american civil war general who noticed that exploding artillery shells in wells improved the gas and oil extraction by 1200 percent and founded the Roberts Petroleum Torpedo Company.

1878 - Electric hydropower dam - William George Armstrong of Newcastle.

1882 - Coal fired power station - Thomas Edison of Milan, Ohio. It was built in London on Holbourn viaduct.

1883 - Solar PV cell - Charles Fritts of New York - and a publication from 1883 stated that, ‘the supply of solar energy is without limit and without cost, and it will continue to pour down on us for countless ages after all the coal deposits of the earth have been exhausted and forgotten.”

1942 - Nuclear Reactor - Enrico Fermi of Rome led the team that built the world’s first in Chicago. 

1970s - Lithium ion batteries (LIBs), Stanley Whittham of Birmingham is called the founding father. LIBs were commercialised by Sony (Japan) in the 1990s. The patent was held in the UK by UKAEA and licensed to Sony.

The UK can certainly demonstrate an incredible pedigree in energy innovation, and the recent BEIS industrial strategy aims to continue the UK’s leadership in this sector.  But almost all these inventions (except for nuclear reactors) are the product of individual endeavour rather than grant funding or subsidy. So what role is there for government subsidy?  

Many of these inventions, innovations and breakthroughs took decades to come to market, and were mostly commercialised only by established actors in the market. The gap in every case (except coal fired power stations) between the innovation and the benefit is far too long for anyone serious about innovating to address climate change before 2050. The issue isn’t the lack of good ideas, but the capability to bring them to market, and integrate them into the system.

The problem is promulgating the technology into the existing energy systems, at an affordable cost and without disruption.  

Changing the energy system in an orderly way is impossibly expensive and this is where subsidies can make a significant impact to address market delays and accelerate this promulgation.  Other market failures affecting innovative energy sources, such as funding the capital intensive research and development costs, and subsidising the price of initial production runs (as starting small means economies of scale can take years to achieve and so a higher price in early years hampers promulgation).   

Recent subsidy initiatives have produced results. Subsidies applied to wind and solar renewables have certainly accelerated deployment, and this has allowed economies of scale to reduce manufacturing costs.  This is through a combination of price support, feed in tariffs, investment and tax incentives.

More is needed. The International Renewable Energy Agency (IRENA) analysis in 2017 proposed  that renewable energy (with energy efficiency) could meet 90% of the Paris Agreement’s energy-related goals, but that to do so further technological breakthroughs and new business models will be required.

There is a growing consensus that carbon pricing may be a better way to subsidise innovation and roll out low carbon power systems. That is, strong carbon pricing will incentivise capital markets to invest in promulgating technologies.  

In addition, reducing the subsidy levels to fossil fuels will also reduce the need for subsidies for low carbon energy generation.  The UK leads the EU in giving subsidies to fossil fuels, with €12bn (£10.5bn) a year in support for fossil fuels in the UK, significantly more than the €8.3bn spent on renewable energy.  

The subsidy for fossil fuels benefits the whole economy, and results in lower transport, heating and power costs, which enables industry to remain more competitive.  Reducing hydrocarbon subsidies in France resulted in the ‘yellow vest’ protests and in the UK, higher energy costs are not going to win any elections.

Even so, reducing the subsidy for fossil fuels may become politically acceptable soon. Increasing levels of climate activism, and the number of mainstream figures and politicians making climate change a high priority will draw attention to the incongruity both of aiming for a low carbon future and of subsidising hydrocarbons.   It is a false economy that drives up barriers to energy innovation by making it harder for new energy tech to commercialise within an energy system where the established carbon based incumbents are sheltered from their real costs.

The politics of climate change will force governments to act in order to stay electable. In November 2020, the UK will host the COP26 in Glasgow, which is a great opportunity to showcase the UK’s tradition of world changing energy innovation, and to highlight some of the astonishing transformations in energy that need promulgation.  We can expect to see a concerted policy effort to support energy innovation over the coming year.

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