April 13, 2009
Megalaser

The American Recovery and Reinvestment Act of 2009 (ARRA) has been touted as a major step towards a more secure and cleaner energy future. This much is quite true. The question is, is the step big enough to span the void and aren’t we risking being pushed into it before the step could be actually made.

 

First, some facts: according to a CNET estimate, ARRA contains more than $60 billion under the chapter of energy, including $38 billion in government spending and about $20 billion in tax incentives over the next 10 years. The Obama administration says $42 billion will go towards energy.  Yet another estimate, by the Center for American Progess,  says the figure is more than $70 billion. But whatever the figure, it is in any case 5-7% of the total - not really much, despite a more than three-fold increase over previous levels of spending.

It is important to understand that it does matter enormously how exactly the money is going to be spent and what the possible outcomes of such spending may be. It is in this context that energy research really has to be appreciated.

Today’s approach to research in energy may be tilted to the short-term perspective, in disregard of the possible long-term consequences despite the fact that the Department of Energy (DOE) is fully aware that “leadership in science remains vital to America’s economic prosperity, energy security, and global competitiveness.” The preponderance of the short-term perspective means that at risk are literally the growth, welfare and security of the nation.

Energy permeates modern society in an unprecedented way. Electricity is a good example of that. Take it out of the picture as if it never was, and you will lose your heating, cooling, cooking, lighting, and most likely water supply. Oh, and your car will not. Not to mention the fridge, TV, radio, computer, washer and dryer. No phone calls, either. Sewage will fail a bit later. And if you think that applies to electricity only, think twice.

Hardly anyone who is involved in energy is not aware of this. The public at large knows about the value of energy, too. And yet we manage to combine a good measure of concern about running out of, say, cheap oil, or suffocating in the global greenhouse, with an equally good measure of nonchalance about research and development in energy.

Maybe that is due to a failure to differentiate between the products and the consequences of research in energy. It is this failure that leads to the preponderance of the short-term outlook. I am not the first one to pay attention to this fact. For example, in 1997, S.E. Cozzens noted that the available research performance indicators measure the short-term outputs of research, not the long-term outcomes. But it is the outcomes that define our lives. For example, one of them could be that a nation that fails to adequately support research in energy would fail to support its long-term security and prosperity.

But why doesn’t the private sector fund energy research in an adequate way, why does the government have to be involved? Well, equating marginal costs with marginal benefits is pretty straightforward and works fairly well when decisions are made on funding research programs designed to achieve a certain output. More often than not, such research programs are technology- or product-oriented.  In cases like this, there will be no shortage of private R&D funding. Because of the positive externalities, public funding in these cases would be just supplemental.

The major failure is in funding research where value is harder to define. For example again, in 1905 Einstein published not one, but five papers, four of which (on Brownian motion, the photoelectric effect, and the two on special relativity) are believed to deserve Nobel Prizes. He was living out of means provided from his daytime job as an officer at the Swiss Patent Office. The Nobel Prize that he did get, in 1921, was for the paper on photoelectric effect . Being just a humble layman in these fields it is hard for me to judge, but it appears that many significant long-term outcomes of Einstein’s work are not in the area of the photoelectric effect. It took 40 years, and the publicly funded Manhattan project, to reveal one of these major outcomes, and about 15-20 more years to begin commercially generating electricity at nuclear power plants. Would private investors have wished to support Einstein’s pursuits in 1904-5 if they had known that a major outcome of his research would come 40-60 years later and be both atomic explosions and atomic energy? The real beneficiaries in the case seem to be the WWII allies – and all of us, indeed.

The strategic benefits of publicly funded energy research fail, as a rule, to be recognized in the short run. For product-oriented research there are ways to compensate. Basic research is a priori a different case. Take into consideration that energy is a productivity tool. I’d say that those who do not support the steps on the pathway from “basic” research in energy to the application of the outcomes en masse literally risk their future. The productivity growth of such nations would likely be on the low side, eventually eroding the base of their stature and welfare.

Besides, the interdisciplinary character of energy research and its fast pace tend to result in the proliferation of various energy technologies that could (and do) serve the same purpose. But having more choices would really not be a problem, right? Maybe, unless you have to invest in energy R&D. For example, right now, in automotive applications one has to consider (a) entirely new prime movers (e.g. fuel cell) and (b) entirely different fuel base (e.g. sugar, grain or cellulose-based ethanol, hydrogen made from natural gas or by electrolysis from water, natural gas, synthetic liquids made from either natural gas or coal), to name a few. A 2001 study looking at the best system on a well-to-wheel energy efficiency and greenhouse emission basis lists some 50+ options (“pathways”) in which energy could reasonably get from its primary source (“the well”) to the wheels. Care to invest in one or more of them?

However, even the proliferation of options in major energy-related technologies and products would not be a problem for investors who make choices in a competitive market environment. The problem is that the various options (“pathways”) have a different structure of inputs and are looking at different timeframes for market penetration, factors that do not exist when 99%+ of the cars have under the hood the good old four, six or eight cylinder pusher. For that reason, a regulatory decision (say, higher federal fuel efficiency standard or a subsidy for biofuels), which would be by and large neutral regarding manufacturers of cars relying on the “standard” petroleum burning reciprocating engine, would have a very different impact on the firms looking at other pathways. Simply put, in an environment where the outcome is subject to significant regulatory risk, truly novel energy technology may not find sufficient private funding for up-front R&D.

Now, a sidebar: does outsourcing energy research mean outsourcing energy prosperity? Well... output-oriented R&D may be good to outsource, since such outsourcing would reduce private cost incurred in R&D, make the relevant products more affordable and help increase the rate of their market penetration. Outsourcing basic energy research, however, would impact a special aspect inherent to fundamental research in general: enabling a nation to deal with problems. Much has been said and written about the benefits of public spending on enabling infrastructure in other sectors, for example the benefits of interstate road infrastructure. Few doubt the positive long-term outcome of this policy, adopted some 70 years ago and sustained to this day. I would say basic energy research is an enabling activity, just like the modern infrastructure. In these days of globalization it may as well be a good thing that at least we can’t outsource the roads.

Once again, what risks are we prepared to carry and what price are we prepared to pay in case energy R&D fails? And does ARRA of 2009 live up to the task – how much of the 5-7% allocated to energy actually goes to research, and out of that, how much will fund output or product-oriented research and how much basic research? The DOE points out that its Office of Science funding package under ARRA of 2009 is designed to energize the U.S. economy in two ways: in the near term, through the creation of thousands of jobs in fields ranging from construction labor to laboratory research; and in the longer term, by strengthening the nation’s capacities for technological innovation, which is seen as a major driver of economic growth and productivity and the key to improving our energy security in coming years. So… yes, R&D is adequately funded?

The vast bulk of energy-related funding available under ARRA of 2009 is short-term, product, output-related, or unrelated to research at all. Some $17 billion will be used for improved efficiency and subsidies to already developed renewable energy sources and to transmission lines. About $25 billion will be used to improve energy efficiency in houses, installations, and equipment, mostly to prevent waste and to apply already existing solutions. About $17 billion go towards transit improvements. DOE’s entire budget for science under ARRA is about $1.6 billion.

If you cared to read up to this point, you may have noticed that there are a couple of dozen question marks above. I have more questions than answers. It is the answers that I think I do have to some questions though that prompted me to share my concerns. We cannot make a transition to a better energy future without adequate basic R&D in energy.

Boyko Nitzov is Dinu Patriciu Fellow for Transatlantic Energy Security and Director of the Eurasia Energy Center at the Atlantic Council. Photo by Flickr user testone22, used under Creative Commons license.

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