4.5.6.1 Public and private funding

Almost all (98%) of total OECD energy R&D investment has been by only ten IEA member countries (Margolis and Kammen, 1999; WEC, 2001). The amount declined by 50% between the peak of 1980 (following the oil price shocks) and 2002 in real terms (Figure 4.32). Expenditure on nuclear technologies, integrated over time, has been many times higher than investment in renewable energies. The end of the cold war and lower fossil-fuel prices decreased the level of public attention on energy planning in the 1980s, and global energy R&D investment has yet to return to these levels despite growing concerns about energy security and climate change (Chapter 13).

Figure 4.32: IEA member government budgets for total renewable energy R&D annual investments for 1974–2003 (left, a) and investment per capita, averaged between 1990 and 2003 (right, b).

Source: IEA, 2006d.

Ultimately, it is only by creating a demand-pull market (rather than supply-push) that technological development, learning from experience, economies of scale in production and related cost reductions can result. As markets expand and new industries grow (the wind industry for example), more private investment in R&D results, which is often more successful than public research (Sawin, 2003b).

The private sector invests a significant amount in energy RD³ to seek competitive advantage through improved technology and risk avoidance in relation to commercialization. Firms tend to focus on incremental technology improvements to gain profits in the short term. R&D spending by firms in the energy industry is particularly low with utilities investing only 1% of total sales in US, UK and the Netherlands compared with the 3% R&D-to-sales ratio for manufacturing, and up to 8% for pharmaceutical, computer and communication industries.

If government policies relating to strategic research can ensure long-term markets for new technologies, then industries can see their potential, perform their own R&D and complement public research institutions (Luther, 2004). Fixed pricing laws to encourage the uptake of new energy-supply technologies have been successful but do not usually result in novel concepts. Further innovation is encouraged once manufacturers and utilities begin to generate profits from a new technology. They then invest more in R&D to lower costs and further increase profit margins (Menanteau et al., 2003). Under government mandatory quota systems (as used to stimulate renewable energy projects in several countries – Section 4.5.1), consumers tend to benefit the most and hence producers receive insufficient profit to invest in R&D.

Recent trends in both public and private energy RD³ funding indicate that the role of ‘technology push’ in reducing GHG emissions is often overvalued and may not be fully understood. Subsidies and externalities (both social and environmental) affect energy markets and tend to support conventional sources of energy. Intervention to encourage R&D and adoption of renewable energy technologies, together with private investment and the more intelligent use of natural and social sciences is warranted (Hall and Lobina, 2004). Obtaining a useful balance between public and private research investment can be achieved by using partnerships between government, research institutions and firms.

Current levels of public and private energy-supply R&D investment are unlikely to be adequate to reduce global GHG emissions while providing the world with the energy needs of the developing nations (Edmonds and Smith, 2006). Success in long-term energy-supply R&D is associated with near-term investments to ensure that future energy services are delivered cost-effectively and barriers to implementation are identified and removed. Sustainable development and providing access to modern energy services for the poor have added challenges to R&D investment (IEA, 2004a; IEA 2006a; Chapter 13).