If the UK is to meet our ambitious net zero target by 2050, then we will need to substantially reduce the emissions associated with heating our homes, powering our appliances, and fuelling our cars. If entrepreneurs and innovators are not able to find affordable low or zero-carbon options, then it will require us to make dramatic changes to our lifestyles.
The good news is we have made real progress over the past decade. In fact, this past month for the first time since 1882, we went more than 28 days without using coal and greenhouse gas emissions from energy have more than halved since 1990. By taking coal off the grid, we have picked the low-hanging fruit of decarbonisation. The next phase will be more difficult and will require more entrepreneurial ingenuity.
Historically, innovation in the energy sector has been slow and start-ups have played a bit part. But that may be changing. A new paper assesses the prospects for innovation and entrepreneurship in the energy sector and finds that innovation is traditionally sluggish. R&D in the sector is low relative to almost any other industry and startups face a number of hurdles.
First, there are large economies of scale in energy. Start-ups will typically require lots of up-front investment in capital before they can break-even.
Second, energy is a commodity. In other sectors, start-ups can compete on cost or quality, and differentiate their product. In the energy sector, consumers will go for whatever’s cheapest.
Third, there are long time lags between idea and commercialisation. Venture capitalists typically expect a return in five-to-seven years, but breakthroughs in energy may take decades.
Fourth, green innovators face a double externality problem. Knowledge spills over, and so their innovation benefits rival companies who can copy their new methods. Compounding the problem, without government intervention (e.g. carbon pricing), the social benefits of cleaner energy are not captured by the innovator, reducing the incentive to invest in green R&D.
Stimulating green innovation will require us to overcome the above problems. Understanding the obstacles to green entrepreneurship will also be key to finding the right policy responses.
On the first three fronts, the authors argue that: “New energy technologies are often smaller and modular (e.g. solar panels, smart meters for homes), reducing the need for large capital costs. While energy remains a commodity, the popularity of products such as Nest thermostats suggests that product differentiation is possible for end-use technologies that improve energy efficiency and potentially improve grid management.”
However, while patenting and VC investment in the renewable sector increased substantially the first decade of the millennium, it has fallen off since 2010. It isn’t clear why this happened. It could, for example, be a result of researchers having picked off the low-hanging fruit. Or, we may simply have shifted from a research phase to a deployment phase. Innovation may still be happening but it might be the sort of incremental innovation that’s hard to patent and better kept as a trade secret.
We can’t ignore the role of pricing either. Unless polluters bear the full social costs of emitting carbon, then consumers will have little incentive to switch to cleaner forms of energy, and nor will innovators have as much incentive to create emissions-saving technologies. In an older paper, for example, one of the authors finds that a “10 percent increase in energy prices leads to a 3.5 percent rise in the number of U.S. patents in 11 different alternative energy and energy efficiency technologies”. The finding is corroborated in another paper from 2017: “A 10 percent higher fuel price is associated with about 10 percent more low-emission energy patents and 7 percent fewer fossil-fuel patents.”
However, it’s important to look at where high or low prices come from too. The paper cites research finding that “consumers are more responsive to changes in taxes than market-generated fluctuations in price, as tax increases are perceived as more persistent”. So while a carbon tax or a ULEZ charge might get you to switch to an electric vehicle, an increase in oil prices won’t.
There’s loads more in this paper, and I’ll probably revisit it in a future blog. Read it here.
We’ve just kicked off a “Green Entrepreneurship” project that will look at how entrepreneurs, and their innovative technologies and ideas, can help deliver a more sustainable future.