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Energy Sector Strategies to

Support Green Growth

Module 04
Supporting Innovation for Green Growth
Lesson 2
Policies for Frontier Innovation and Adaptive Innovation
World Bank
Institute

Presentation Script

Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

About this Presentation


This lesson will explore the policies for how governments can promote frontier
innovation and adaptive innovation. More specifically, you will learn about; How
governments can promote frontier innovation through a balance of supply side and
demand side policies; How governments can support adaptive innovation through
facilitating access to and stimulating the uptake of technologies; We will also provide
some links to references and resources for more information.

Policy Instruments for Innovation


In the previous lesson you learnt about what green innovation is and the rationale
for governments to set policies to support it. We will now start looking at the more
specific innovation policies. This lesson reviews policies for promoting frontier
innovation and how to strengthen adaptive innovation. The policies for stimulating
entrepreneurship & absorptive capacity as well as strengthening international
collaboration are covered in the next lesson.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Innovation Policies to Promote Frontier Innovation


We start with Frontier innovation. To promote frontier innovation, there is a need
for supply side policies in form of technology-push as well as demand side
market-pull policies. Supply side policies support industries and firms, reducing the
costs of knowledge creation. Demand side market-pull elements aim to enhance
the demand side in the form of incentives for consumers and producers. This can be
increasing the revenues from sales after commercialization which increases the
demand for knowledge and research. This co-existence implies that we cannot just
rely on a big technology push but rather, innovation comes from the demand side
too. If there is no demand, there will be no incentive to innovate.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Supply Side - Public Funding to Labs and Universities


We will start by looking at how Governments can support Research and
Development. The traditional supply-push mechanism is Government funding to labs
and universities. The benefits of public funding is that it allows governments to have
more influence on what is researched in labs and they can also select the
participants to research projects which allows coordination of research efforts. Other
benefits of public labs are that it can encourage applied research on topics relevant
to the national interest, but also basic research with no particular end goal. It also
eases the coordination across researchers.
According to International Energy Agency, to develop, deploy and diffuse 17 key
technologies for green growth globally will require about $1 trillion per annum
between until 2050.

Several developing countries have advanced their public funding in research and
development of green technologies. Please click on the examples to learn more
about Chinas and South Koreas supply side investments in Research and
Development.

Supply Side Provide Research Grants


Next we have the provision of Research grants. Research grants provide funds for
basic and applied energy research. They are usually from government to universities
or individuals in research organizations and to private entrepreneurs and firms, but
could also come from foundations or multilateral facilities. The benefits are that it is
easy to target specific sectors of the energy field and also include requirements of

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

social co-benefits in the grants. Yet, of course, grants for basic research do not
ensure commercialization as they only address early stages of the technology cycle.

An example of research grants comes from Malaysia, please read through the
example to learn more.

Supply Side Tax Credits for Energy Research


Tax credits are tax reductions granted to entities that undertake desirable research
and innovation activities. The benefits of tax credits are that they help stimulate
corporate investment in energy research projects and thereby make
commercialization of innovations more profitable. Yet one weakness with tax
incentives is that it may promote distorting tax avoidance rather than productive
investment, especially in countries with a weak tax enforcement system.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Supply Side Strengthen national research infrastructure


We now move on how to strengthen national research infrastructures in developing
through capacity building. Today, many countries research infrastructure is weak,
not necessarily because of inadequate funding, but rather because they lack
capacity, efficiency and experience. Therefore there should be an assessment of the
situation before funding begins, and including input from researchers, government,
the private sector and naturally, the universities and labs themselves. A key
challenge is to ensure that such expenditures lead to productive impact in society at
large, as there is a legacy of significant expenditures with low broader social impact.
Please read through the methods on how to strengthen the national research
infrastructure.

Supply Side Early stage development finance


The fifth set of supply side policies relates to the financing options for the early
development stage of technologies. As we learnt in the previous lesson, once new
ideas with commercial potential have progressed from the research phase to the
applied research stage or pre-commercial stage they need further financing and
mentoring support in order to be fully commercially viable and avoid the valley of
death

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

As the figure shows, this can come from both public and private resources. Public
support in the form of matching grants and soft loans can be important. The private
sources at this early stage typically come from own sources (home equity loans,
retained earnings), friends and family, and so-called angel investors. Venture Capital
or VC investors and Private equity firms and Private corporations usually come in a
little bit later in the process. As an example Venture Capitalist firms typically look for
3-5 years to pay out.
VC Investors and Angel Capital investors are the best suited to finance clean energy
investments that are risky and fairly small. Although they will not provide more than
a fraction of the resources needed, they can fill a key niche for driving green energy
projects.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Since VC firms have shown to be a dynamic force to bridge the gap between
research and commercialization, it can be useful to have policies that help create a
supportive environment for such firms, including an adequate legal, regulatory and
tax environment on the supply side, and a sufficient flow of bankable deals on the
demand side. Policies to help nurture and support bankable deals include business
incubators. Business incubators can be defined as programs that are designed to
support the successful development of companies through several business support
resources and services. Please click on the box to learn more about examples of VC
firms in the energy sector and how the Brazilian government has implemented
policies to support VC investors.

Demand Side Prize Funds


Of all demand side policies, perhaps the most important include appropriate market
prices that reflect the underlying market failures, and policy stability so that
investors making longer-term plans know that the policy regime will not be radically
different before they are able to recoup required returns from their investments. We
will now look at market pull mechanisms for promoting research and development in
neglected technologies, namely in areas not currently being addressed by the market
on its own.

Two useful mechanisms are Prize funds and advanced market commitments.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Prize funds are pre-announced prizes that are given to whoever comes up with an
innovation that meets defined objectives. They are most appropriate when
objectives can be well defined but the technologies are unknown.
The benefits are that the financial reward stimulates competition and the prize can
attract large organizations as well as individuals and small organizations. On the
other hand, prize funds might set requirements which are too easily met, which
unfortunately will lead to a missed opportunity for pushing the innovation frontier
out further, as well as resulting in a disappointing outcome for the funders. Please
read through the examples of prize funds; when you are done, proceed to the next
slide.

Demand Side Advance Market Commitments


Advance Market Commitments or AMCs are purchase guarantees to private sector
developers that they will get sufficient returns on investment in specific technologies
once they have been developed. This reduces the uncertainty of the
commercialization stage and provides developers with the incentive to invest in
Research and development and to expand their manufacturing capacity. AMCs are
more likely to encourage incremental Research and development than they are to
lead to breakthrough, radical technologies, since the key characteristics of the
technology need to be known in order to be specified in a contract. AMCs would
therefore be best suited to ameliorate an existing product. To date, AMCs have
mainly been applied to health technologies. Yet there have been many attempts to
use feed-in tariffs, a policy instrument that shares with AMCs the key feature that is
a demand-side pull instrument committing to purchases at a pre-announced aboveretail market price, though it typically is used to stimulate investment in existing but

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

higher-cost technologies such as solar PV and tidal power by offering eligible


producers long-term cost-based contracts that ratchet downward over time to
encourage technological cost reductions. One of the examples comes from Sri Lanka.

Policy mix: Supply Side-Demand Side


As the last part of policies to support frontier innovation, we will look at how
governments can put together a policy mix for a certain sector or technology that
has special potential in the given context. The policies usually include great emphasis
on how to strengthen the initial phase of the technology cycle and thereafter how to
assure its commercialization. All energy technologies will offer differing elements of
interest depending on the specific country situations., for example, might be of
interest to some countries because they have a domestic solar panel manufacturing
industry, and of interest to other countries because it can offer a cheaper alternative
to grid-connected electricity for rural applications. Another option with appeal
across country contexts is the transformation of waste, especially agricultural waste,
into biomass. For many developing countries agriculture is the mainstay of the
economy, leading to large amounts of agricultural waste.
An interesting example of how biomass can be made a national priority for a
Government, comes from Malaysia. Please read through the example to learn more.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

In Malaysia, palm oil cultivation takes approximately 95 per cent of the total
agricultural land. The oil extraction process generates a large amount of biomass. In
fact, only about 10 per cent of oil is generated from an oil palm tree, and the rest is
yielded as waste. The challenge for Malaysian palm oil industry is therefore to
effectively utilize the increasing amount of oil palm waste, as the waste and residue
from oil mills and processing plants always pose threats to the environment. If
managed well, these wastes could be turned into new sources of energy, thereby
contributing to the national economy of Malaysia. The Malaysian government has
taken important policy measures to capitalize on the opportunities. First step was to
establish the National Biomass Strategy 2020: New wealth creation for Malaysias
palm oil industry. The document specifically focuses on the development of the
high-value downstream linkage, e.g. bio-energy, bio-fuel, bio-chemicals, using oil
palm biomass. By doing so, it envisions to generate high value jobs and to foster local
technologies for the benefit of the national economy.

Policy Instruments for Innovation - Strengthen Adaptive Innovation


After have gone through policies to promote frontier innovation, we now move on
to, policies to strengthen adaptive innovation.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Innovation Policies to Strengthen Adaptive Innovation


As mentioned in the previous lesson, improving the diffusion and adaptation of
already-existing technologies to local contexts is crucial for developing countries to
green the energy sector.
The policies for adaptive innovation that we will go through are divided into policies
that facilitate access to existing technologies and those that stimulate their uptake.
Policies that facilitate the access of technologies are important to increase local
firms awareness and ability to take advantage of global knowledge. Without policies
that facilitate access, barriers in the form of intellectual property rights and tariffs on
trade may not be appropriately addressed. As for policies that stimulate technology
uptake, they are important because green technologies often are more costly to
adopt by firms and not immediately more attractive to end-use energy customers.
Hence, the demand-side policies are critical incentives for firms to trigger adoption.
Firms will not adopt technologies for which there is insufficient or insufficiently nearterm financial reward.
More specifically, we will go through three categories of policies: Openness to trade
and Foreign Direct Investment, Patent policies, and Demand side policies of public
procurement, standards, regulations and improvements of the financial
infrastructure.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Facilitate Access - Openness to Trade


The best policies to facilitate access to clean energy technologies is having countries
open to international trade, foreign direct investment, worker migration and other
forms of global connectedness.
Trade contributes to adaptive innovation because many green technologies are
embedded in imported goods, machinery and equipment. Such technologies,
including knowledge-based processes and business models, are also diffused via
movements of people attached to multinational companies or from the Diaspora.
In fact, a recent World Bank study finds that eliminating tariff and non-tariff barriers
in the top 18 developing countries ranked by greenhouse gas emissions would
increase imports by 63 percent for energy-efficient lighting, 23 percent for wind
power generation, 14 percent for solar power generation, and 4.6 percent for clean
coal technology.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Facilitate Access Foreign Direct Investment


Moving on to foreign direct investments, it can generate important spillovers,
resulting in the upgrading of domestic innovative capacity, increased R&D
employment, better training and support to education. All of these are important
contributions for countries to strengthen their adaptive innovation.
Lets look at an example, India.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Facilitate Access Patent Policies


The next set of policies to increase access to existing technologies relates to patents.
The issue of patents concerns the controversial subject of Intellectual property
rights, so called IPRs. IPRs confer and protect the technology ownership of patent
holders. This creates a distortion in terms of a monopoly power. Originally property
rights are justified for being means of achieving economic efficiency. Yet, by
contrast, IPRs result in a standing inefficiency of the market.
So what is the problem with this?
So how can patent policies strengthen adaptive innovation?

We will look at four patent policies in the next few slides. Before moving on, it is
however important to remember that these policies do not need to be exclusive to
one another but rather there can be an advantage to pursue several of these patent
policies simultaneously.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Patent Policies - Compulsory License Agreements


Click on each patent policy to learn more.

Compulsory licenses are legal permissions to manufacture a technology without the


consent of the patent owner. This makes it easier for countries to reduce some of
the inefficiencies associated with the current patent system, and ensure more
affordable access to patented green innovations by poorer households in lowincome countries. It can also help reduce the deployment costs. However, absent
adequate compensation to the original license holder, compulsory licenses can also
entail costs in terms of foreclosing useful complementary knowledge sharing by the
license holder or other retaliatory actions.
An example is Suntech, Chinas biggest wind producer.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Patent Policies Patent Pools


In a patent pool, a group of patent holders agree to license a combined set of
patents to one another, it can either be to one another, which is a closed pool or to
any party (an open pool). Patent pools have been proposed as a solution for
inefficiencies that arise in the patent system when too many related fragments of
patents are necessary to develop future inventions. The benefits of patent pools are
that it
 Reduces transaction costs of patent filing, manufacturing, marketing and
distribution costs to each partner
 Increases profit generation potential of the partners combined, though not
necessarily of each partner
 Encourages the diffusion of technology
Yet, patent pools may reduce innovation because of fear of having to share profit or
for smaller competitors or for fear of having to compete with firms in major patent
pools.

An example of how patent pools can work is the World Intellectual Property
Organizations initiative called WIPO Green.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Patent Policies - Patent Buy-out


A patent buy-out is a mechanism to increase access to existing products, or to future
products that already benefit from satisfactory innovation incentives. The idea
behind patent buy-outs is that a purchaser, it could be an international financial
institution, government or private foundation, acquires exclusive marketing rights
for a patented global green product from the patent owner under a buy out formula,
and offers a non-exclusive, no royalty license to any legitimate generic manufacturer
to sell the product in certain target developing country markets. By having a generic
pricing in target developing countries and maintaining a regular patent-based pricing
in all other countries it is easy to target developing countries.
Yet, the challenges with buy-outs are the development of a mechanism to determine
an appropriate buy-out price and the availability of a purchaser of the patent at the
determined price.

An example of how patent buy-outs could work has been proposed during
Conference of the parties negotiations under the UNFCCC.

Patent Policies - Patent Commons


Patent commons are similar to patent pools but instead of limiting it to companies,
patent commons allow the public at large to access patent resources, hence there is
no royalty payment.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

The benefits of Patent commons are that it promotes sharing of patent information
and may reduce deployment costs
Yet, due to the lack of implementation know how to complement the patent info,
deployment potential might be reduced. It might also discourage popular, so called
blockbuster patents, because of the loss of monopoly marketing ability for the
patent holder.

An example of patent commons is the nonprofit Eco-Patent Commons initiative.

Demand-Side Policies to Stimulate Adaptive Innovation - - Regulatory Policy Instruments


We will now look at some of the demand side policies for adaptive innovation. These
demand-side policies provide critical incentives for the adoption of technologies. As
mentioned earlier, if the demand is low, it is less likely that that firms adopt
technologies.
We will go through four policy areas. First are regulatory policy instruments that
support clean energy technologies. These regulatory mechanisms facilitate, and can
even be seen as preconditions for the diffusion and absorption of green
technologies. This is so because these types of policy instruments can incentivize
countries and firms to invest in green technologies.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

Stimulate Uptake - Improved Financial Infrastructure


We then move on to improving the financial environment. In order for firms to be
able to adapt available technologies and have a sufficient customer base to sell
them, the business environment has to be improved in terms of the bureaucratic
climate, meaning reevaluation of regulations for economic transactions as well as
making it easier for end-use customers to obtain financing to buy innovative new
products.
Examples from around the world show how important it is to improve the financial
environment in order to ensure funding for projects, especially due to high start up
costs.
In Malawi and Rwanda, lack of financing for the adoption of efficient stoves and
small biogas plants has been one of the main barriers. In China, access to financial
credit and quality of after-sales service were important factors to projects that adapt
technologies for solar home systems.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

In addition, peer research has shown that across a range of low-income countries, an
increase in financial intermediation and long-term loans has a significant effect on
the adaptation of non-hydro renewable energy generation.

Stimulate Uptake - Public Procurement


Governments can also influence adaptive innovation through public procurement. As
we learned in previous Modules of this course, Governments are large consumers of
energy and if they send signals to the private sector that they will buy green energy,
it can help firms to reduce their early stage production costs. Green procurement
could also be the purchase of goods and services that run on renewable energy
sources. These policies can also motivate new companies to enter into the market,
and if the market evolves rapidly, and prices drop, private users of green energy will
become more motivated.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

An example from South Africa, shows have Governments can make green-friendly
use of Public Procurement.

Stimulate Uptake - Standards


Governments can also use demonstration standards, change technological
standards, renovate or re-invest in public assets (such as buildings and
infrastructure), and take a lead in educating consumers and firms to engage in more
sustainable consumption and production. Standards policies include fuel efficiency
standards for vehicles, biofuel standards for vehicles, electricity efficiency standards
for appliances and electronics and power generation standards. All these standards
incentivize developers that they can get returns from deploying green energy
technologies. In the longer run, this production could in turn contribute to the
generation of jobs in the energy sector.

Key Messages
This last slide is dedicated to summarizing key messages from this lesson. Please take
your time to go through them. In the next slide you will find references, if you wish
to learn more about the subject covered in this lesson.

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Energy Sector Strategies to Support Green Growth


Module 4: Supporting Innovation for Green Growth. Lesson 2: Policies for Frontier Innovation & Adaptive Innovation

Presentation Script

References and Further Reading


Here are some useful references if you wish to learn more about the subject covered
in this lesson.

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