Jim Watson

The transition towards a more sustainable society will require the development and deployment of a range of new and existing energy technologies - from centralised supply side options such as CCS, through infrastructure technologies that underpin decentralised energy networks, to household technologies such as LED (light-emitting diode) lighting and micro-generation. This chapter discusses technology assessment, choice and incentives for a more sustainable UK energy system. The key questions addressed in the chapter are how government should prioritise the support given to these technological options, and what incentives should be provided to speed up the processes of development and deployment.

The effectiveness of policies to support innovation depends on the extent to which they are rooted in an understanding of the innovation process. As the large body of literature on the subject indicates, the innovation process is a complex one. This chapter does not allow enough space to discuss this literature in detail. Instead, the discussion will highlight some of the key insights that have particular relevance to government innovation strategies.

The innovation process includes several distinctive but related stages - from R&D, through prototyping and demonstration, to commercialisation and deployment. Early conceptions of innovation

* This chapter was originally planned as a joint effort with my late colleague Shimon Awerbuch to whom this book is dedicated. It draws on some of his major contributions to policy debates in the UK and beyond, particularly on the problems of engineering approaches to power generation costs and the merits of portfolios. He may not have agreed with all of the arguments presented since we often had healthy disputes - something I miss. I have nevertheless tried to do justice to his work.

characterised the process of moving through these stages from R&D to deployment as a linear one. However, this 'linear model' was soon abandoned by many of those engaged in innovation as well as some of those trying to understand and support it.

Roy Rothwell has shown how the innovation process has changed over time, and has characterised five different models of organisation (Rothwell, 1994). Early firms in the industrial revolution used a 'technology push' model in which new product and process innovations were pushed into the market. This gave way to a second 'demand pull' model that was characterised by market and customer-focused innovation. This was followed by a third, 'coupled', model of innovation in which both demand pull and technology push played a role. R&D and marketing processes were linked together. The fourth model that emerged took integration further - with strong links to supply chains and to important 'lead customers' for new products. Finally, a fifth, 'networked' model of innovation was put forward, with further integration of activities and closer relationships with suppliers and customers. This also included an emphasis on speed and flexibility of innovation and product development to respond to changing needs.

This increasingly sophisticated understanding of innovation is further enhanced by a recognition that the scale and scope of innovation varies widely. Chris Freeman (1992) drew attention to the contrast between incremental innovations that lead to improvements in existing products, and radical innovations which yield new inventions and/or methods of production. He also showed how a series of radical innovations in different parts of the economy can lead to changes in technological systems, for example through the adoption of a series of low carbon technologies (Stern, 2006b, Chapter 16). Going further, changes of techno-economic paradigm can occur when a set of innovations has a pervasive effect on the whole economy. An example of this is the widespread uptake of information technology.

Many studies of the innovation process emphasise economics as a key driver for technical change. However, this does not mean that the relationship between relative costs and the success of new innovations is a simple one. Freeman and Louga (2001) note that wide-ranging shifts in techno-economic paradigm are driven by the prospect of 'super profits' for innovators. Such super profits help to offset the risks of investing in radical new innovations. In the early stages of new innovations, however, incumbent technologies can have a price advantage. For example, when electric lighting was first introduced in the 1880s, it was four times more expensive than gas lighting (Pearson and

Fouquet, 2006). Parity in cost was only achieved in the 1920s. While the diffusion of electric lighting was driven by the potential for cost reductions, it also occurred due to other non-economic benefits it offered to users.

These and other insights have led to a number of standard rationales for government intervention and/or financial support for innovation. Most of these focus on the existence of one or more market failures (e.g. Scott and Steyn, 2001; DTI, 2003a). In the field of sustainable energy, two market failures are most commonly cited. First, that the social costs of carbon emissions from the energy system are not fully internalised. This means that technologies that emit less carbon are at a disadvantage. Second, that there is a tendency for the private sector to underinvest in R&D because individual firms cannot fully capture the returns from their investments. The corollary of these two market failures is a policy framework that emphasises market mechanisms (such as emissions trading) that price carbon emissions and some government funding for R&D. However, most analyses now agree that government technology policies have to do more than fund basic R&D and internalise the social costs of carbon emissions (Gallagher et al., 2006; Bonvillan, 2007). There may be a need for governments to support other stages of the innovation process. For example, there has been increasing attention on the 'valley of death' that faces technologies as their developers try to move from demonstration or prototype phase to commercial deployment (Grubb, 2005). Institutions such as the Carbon Trust in the UK have a remit to support innovations through this stage.

Beyond this, there are several further rationales for intervention that stem from more than just market failures. These emphasise system failures such as the lack of linkages between actors in innovation systems within particular countries or sectors. In 2003, an economics paper by the UK Department of Trade and Industry acknowledged these system failures. It advocated support for networks of firms involved in the innovation process, and identified the need to counter market, technological and regulatory uncertainties which can make innovation particularly risky (DTI, 2003a).

Such system failures are particularly important for low carbon and sustainable technologies (Foxon, 2003; Stern, 2006b). The adoption of some of these requires both technological change and institutional change. For example, the diffusion of smart metering technology is not just a simple technical challenge but also implies a new approach to information provision to energy consumers and new information technology infrastructure. Other technologies require new links between established but hitherto separate actors within the innovation system. For example, CCS technologies require new collaborations between utilities, oil and gas companies and power equipment companies.

One of the most important sources of system failures for sustainable technologies is 'lock-in' (Unruh, 2000; Chapter 6 above). Many parts of the energy system consist of long-lived capital assets including power stations, gas pipelines and buildings. Furthermore, these are supported by systems of rules, regulations and institutions that co-ordinate energy flows, market relationships and investment decisions. Technologies and institutions co-evolve and are closely integrated (Geels, 2004; Weber and Hemmelskamp, 2005). New technologies that respond to policy needs to reduce carbon emissions or enhance energy security can therefore face pervasive barriers to adoption because the energy system is not set up to accommodate them.

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