Tyndall Briefing Note No.
3
An Audit of UK Energy
R&D:
Options to Tackle Climate
Change
Dr. Jim Watson and Alister Scott
Environment and Energy Programme
SPRU – Science and Technology Policy
Research
University of Sussex, Falmer, East Sussex,
BN1 9RF
Tel. 01273 873539
Email w.j.watson@sussex.ac.uk
Synopsis
It is now widely accepted that global climate
change presents a substantial threat to modern
societies. According to the Royal Commission on
Environmental Pollution, a 60% cut in greenhouse
gas emissions is needed over the next 50 years to
mitigate its impact. This cut cannot be achieved by
making small changes to the current energy
system. Radical change is required – change which
must bring forward new infrastructures, new
incentives and cleaner, more efficient patterns of
energy use.
The Cabinet Office review of energy policy is
currently examining the long term issues facing the
UK energy system. The decision by the Secretary of
State for Trade and Industry to initiate a parallel
review of public support for energy research and
development (R&D) [1] is timely and welcome.
Public funding for the development and deployment
of low-carbon technologies has an essential role to
play in the transition to a more sustainable energy
system. The review provides an important
opportunity to reappraise the rationale for public
support for energy R&D, the form it should take
and the priorities it should reflect.
Based on a SPRU response to the DTI review [2],
this briefing seeks:
• to review the evidence on the level of UK
investment in energy R&D;
• to examine the rationale for public support of
energy R&D;
Tyndall Briefing Note No. 3
December 2001
• to identify lessons from past experience in the
UK and abroad; and
• to set out some ideas for a balanced approach
for R&D in the context of wider government
programmes aimed at cleaner technology
deployment
UK Energy R&D – A Dramatic Decline
Public funding for energy R&D in the UK has
declined dramatically over the past decade or so
[3]. During the 1970s and 1980s, annual funding
was typically several hundred million pounds.
Funding has recently declined to around £50m per
year or less, representing as little as 10% of the
annual budgets of the late 1980s.
Whilst this steep decline in public funding mirrors
the trend in many other countries, the UK situation
is particularly severe for two reasons. First, the
magnitude of the decline is bigger than in any other
member country of the International Energy Agency
(IEA). Second, the UK budget is now comparable to
that of EU Member States with smaller economies
(e.g. Spain, Denmark and Norway) rather than the
leading economies of France and Germany.
Of course, the magnitude of a national R&D
budgets is only a partial indicator of successful
technological development. There are numerous
examples of government R&D programmes that
have failed to achieve their aims of new commercial
energy technologies. Examples include the fast
breeder nuclear reactor [4] and, more recently, US
government efforts to develop advanced cleaner
coal technologies for electricity generation [5]. It is
often the case that these failures are a result of
governments trying to create a market for a new
technology where no demand exists – the upshot is
that firms become dependent on government
support, and there is little prospect of subsidy-free
commercialisation.
On the other hand, there is also a wealth of
evidence from the UK and abroad that a critical
mass of public support is necessary to maintain a
viable skills base for new technology development.
The idea that partly drove the fall in UK energy R&D
expenditure – that governments should leave
almost everything to the market – is equally
flawed.
Without government spending, the UK would not
have been able to take a leading role in
international climate change negotiations. UK
carbon dioxide emissions have fallen significantly
since 1990 as a result of the ‘dash for gas’, which
saw the construction of a large number of highly
efficient combined cycle gas turbine (CCGT) power
December 2001
stations [6]. It is often argued that the CCGT is a
privately developed technology that owes only a
small debt to public R&D support. In reality,
developments in CCGT efficiency and environmental
performance have only been possible due to
technology transferred from multi-billion dollar
government development programmes for military
jet engines.
The Rationale for Public Support
As the DTI has pointed out, a strong rationale for
public funding of R&D in areas such as sustainable
energy is that the potential social return is much
larger than the private returns appropriable to
individual companies. The DTI proposes that
evidence of one or more market failures should be
supplied in order to make a case for public support
of a given technology (e.g. solar photovoltaics).
As recent research on the economic benefits of
publicly funded research shows, the market failure
approach assumes that the creation of new
information is the main benefit of public research
[7]. In practice, public research creates many other
important benefits, including:
• Training of skilled graduates and other
personnel
• Supporting new professional networks and
stimulating cooperation and collaboration
• Expanding the capacity for technological
problem solving
• Producing new instrumentation and
methodologies
• Creation of new firms
• Provision of social knowledge relevant to
innovation.
All of the above benefits underpin innovation, but
often in an intangible, complex and long-term
manner. The simple ‘linear model’, where research
is seen to produce economically useful information
which firms then exploit, underestimates the
benefits of public R&D by dwelling on the direct and
more easily measurable contributions. One topical
illustration of this has already been mentioned –
the development and commercialisation of CCGT
technology in the electricity industry. In addition to
these benefits, public research creates three types
of strategic value for the innovation process:
• Capability – creating the skills needed to take
advantage of scientific information.
• Variety – helping to generate diverse options to
counter the market’s tendency for path
dependency and lock-in (i.e. the tendency for
competing firms to home in on a limited set of
technological options, making it increasingly
costly for other options to be used).
• Capacity – a quantitative idea that combines
capability and variety in an expression of the
size of the investments needed to ensure high
levels of innovation.
Tyndall Briefing Note No. 3
The market failure and linear approaches to
investments in R&D also encourage policy-makers
to focus too much attention on the problem of
international free riders, where one country’s R&D
becomes exploited by firms elsewhere. What this
overlooks is that scientific or technical knowledge
requires substantial capabilities on the part of the
user. It also downplays the international nature of
many R&D activities. To be able to innovate at the
cutting edge, firms and countries need to invest in
R&D so that they have the capabilities to make use
of the latest international developments.
This analysis suggests that, in addition to public
sector investments, government policy should be
explicitly aiming to encourage private-sector
investments in R&D. Overall, UK industry in the
energy sector seems to have a relatively poor
record in such investments, and in bringing new
energy technologies to market. Therefore it is
currently in a weaker position to exploit public
sector R&D undertaken in the UK and indeed
elsewhere.
The Value of Public Support – Lessons from
the UK and Abroad
As we have already suggested, there is substantial
evidence that properly directed and thought-out
public R&D can achieve significant results.
One example is the Japanese R&D programme for
solar photovoltaic (PV) technology, which
commenced around 20 years ago. A recent
evaluation of this programme has identified a
consequent ‘virtuous cycle’ of private sector R&D
funding (which has been consistently larger than
the public budget) leading to an increase in
installed capacity, production volumes and a
reduction in unit price [8]. Although the market for
PV technology is still largely underpinned by public
subsidies, costs have fallen a long way (in Japan, a
95% fall in production costs occurred between 1974
and 1994). Furthermore, Japanese companies are
now among the world leaders in this field.
Another success story is US government support for
R&D on large gas turbines. The US Department of
Energy’s (DoE’s) Advanced Turbine Systems
programme [9] has provided US suppliers with a
competitive edge. The DoE has contributed part of
the cost of technology development, university
research and pre-commercial demonstration. The
result is that US companies such as GE and
Siemens Westinghouse now offer the most efficient
(and cleanest) gas turbines in the world, with
efficiencies of 60% in combined cycle mode. One of
the first commercial plants is currently being
constructed in Wales at Baglan Bay [10].
Closer to home, the UK new and renewable energy
support programme has had some success. This
consists of both an R&D programme and a market
enablement mechanism for technology deployment,
the Non-Fossil Fuel Obligation. The coupling of
these two elements has been important for the
success of the UK approach in bringing down the
costs of a number of renewable energy technologies
December 2001
[11]. Where it has been less successful is in
accelerating deployment. Whilst some technologies
such as onshore wind now need only very small
subsidies, a cumbersome planning process has
made deployment painfully slow, and a large
proportion of renewable energy equipment is now
imported.
Is the Balance Right?
Having made the case for public support, it is
important to evaluate how limited government
funds should be spent. In principle, it is essential
that the government does not ‘pick winners’. A
diverse portfolio of basic research, development,
demonstration, and technologies should be
supported to allow for the large uncertainties
associated with future directions of technical
change as well as rapidly shifting market
conditions.
It is, however, equally important that this need for
diversity does not dilute public R&D effort because
it is thought to be a good idea to do a bit of
everything. The UK cannot compete with the USA
and Japan in some areas (large gas turbines being
a case in point). In others, there is enough
evidence to suggest that commercialisation of a
particular option is unlikely in the foreseeable
future, whether government support is given or
not.
The classic technology that falls into the second
category is nuclear fusion [12]. It is fascinating to
observe how fusion has continued to attract large
amounts of public subsidy in many countries
despite a complete lack of commercial prospects.
Since the mid-20th century, fusion has always been
around 50 years away from commercialisation.
Given this record, it is not clear why £38m is spent
by the UK government each year on international
fusion research – this is the same amount the DTI
Energy Group spends on all other options put
together.
We argue that the same criteria that are used to
judge R&D support for other energy technologies
should be applied to nuclear fusion. What this
implies is that, unless the overall level of public
funding for energy R&D in the UK is very
substantially raised, funding for fusion research
should be cut to a much lower level. This would free
up money for short and medium term prospects
such as some renewables, system and network
integration technologies, microgeneration
technologies (e.g. micro turbines and fuel cells) and
the evaluation of potential ‘wild cards’ like carbon
sequestration.
Overall, the level of public energy R&D support in
the UK needs to be increased substantially. If the
UK wishes to achieve and maintain a leading
position in at least some technological areas,
resources have to be made available by the
government to leverage increased activity by the
private sector. One possible approach would be to
peg investment levels at similar per capita levels to
those countries in the IEA that invest the most,
Tyndall Briefing Note No. 3
although we recognise that this implies a
substantial increase in funding. In addition to
supporting expanded technology-specific R&D, this
would also allow increased scope for research into
appropriate policies and regulations for new
technology deployment.
Towards Cleaner Technology Deployment
How can a future energy R&D portfolio be focused
without at the same time running into the hazards
associated with ‘picking winners’? The present
practice of using the Foresight process to help set
R&D priorities is one way of addressing this
problem. Within these priorities, it is important that
the full range of technology prospects is captured.
At one end of the R&D spectrum, it is a good idea
to require some industrial co-funding for
technologies that are more applied and near-
market. At the other, it is essential to reserve space
for a substantial amount of ‘blue skies’ basic
research for technologies with no immediate
prospect of commercialisation.
As the DTI has rightly acknowledged, public R&D
support for cleaner energy technology options is of
limited benefit if it does not lead to widespread
deployment of new products. To some extent, the
UK new and renewable energy programme has
shown how essential it is to have a link to an
appropriate deployment mechanism (in this case,
the Non Fossil Fuel Obligation and the Renewables
Obligation).
In many discussions about new deployment
programmes (recent examples include cleaner coal
technologies and solar photovoltaics), there is a
temptation for firms to see them as a vehicle for
technology demonstration. Demonstration and
deployment require different approaches.
Demonstration produces results that are necessarily
experimental and unreliable since the aim is to try
out new techniques. Deployment requires the
opposite – reliable technologies that can deliver
environmental and commercial results. Deployment
schemes like the Renewables Obligation are a
bridge between R&D and full commercialisation.
They provide transitional subsidies to compensate
for market failures. For many renewable energy,
cleaner fossil and demand side technologies that
might contribute to the UK’s efforts to reduce
greenhouse gases, it is this kind of deployment
support that is required as much as basic R&D.
Public support for R&D should be complemented by
a range of other policy initiatives, similar to the
market transformation approach adopted in policies
aimed at certain sectors of the consumer goods
markets. This can include signals about public
procurement and the willingness to analyse and
make alterations to the relevant regulatory
frameworks.
Conclusions
This rather brief survey of the available evidence on
public funding for energy R&D has highlighted a
number of important points. These include:
December 2001
• Public funding will play an essential role in • The funding portfolio should be targeted since
bringing cleaner energy technologies to market the UK cannot compete in all technological
– the private sector cannot complete this task areas, and it should retain space for ‘blue skies’
alone; research on longer term prospects as well as
near market technologies.
• Public support for R&D has a wide range of
benefits for innovation and market creation Finally, we have pointed out the key role of
beyond the creation of new scientific and additional policies to deploy energy technologies
technological information; that have been developed with the help of public
R&D programmes. Without such policies, it will be
• Future public energy R&D programmes can
extremely difficult for the UK energy system to
learn valuable lessons from past successes and
achieve the radical change necessary to make a
failures at home and abroad;
serious contribution to climate change mitigation.
• The challenge of climate change requires an
overall expansion of public R&D funding; and
Notes
[1] We use R&D as a shorthand for research, development and demonstration throughout this briefing.
[2] The DTI Review of Energy Research and Development was launched in October 2001. See
http://www.dti.gov.uk/renewable/erag_review.htm. A full version of the SPRU response is available from
the authors.
[3] International Energy Agency Energy Policies of IEA Countries: 2000 Review (OECD/IEA 2000).
[4] O Keck ‘A Theory of White Elephants: Asymmetric Information in Government Support for Technology’
Research Policy Vol. 17 (1988) p187.
[5] J Watson et al. The Transfer of Cleaner Coal Technologies to China: A UK Perspective Report No. COAL
R196, Department of Trade and Industry (August 2000).
[6] WJ Watson Constructing Success in the Electric Power Industry: Combined Cycle Gas Turbines and
Fluidised Beds DPhil Thesis SPRU, University of Sussex (1997).
[7] A. Scott, G. Steyn, et al. (2001). The Economic Returns to Basic Research and the Benefits of University-
Industry Relationships: A literature review and update of findings. Report for the UK Office of Science and
Technology. Brighton, SPRU, November.
[8] C Watanabe, K Wakabayashi and T Miyazawa ‘Industrial Dynamism and the Creation of a “Virtuous Cycle”
Between R&D, Market Growth and Price Reduction: The Case of Photovoltaic Power Generation
Development in Japan’ Technovation Vol.20 (2000) pp299-312.
[9] Details are available at http://fossil.energy.gov/coal_power/turbines/index.shtml.
[10] J Watson ‘Holy Grail at Baglan Bay’ Supplement to Financial Times Energy Economist (September 1999).
[11] SPRU Evaluation of the DTI New and Renewable Energy Programme 1994-8 Confidential Report to the DTI
(1999).
[12] For a historical review of fusion R&D, see J Clark and G MacKerron ‘Great Expectations: A Review of
Nuclear Fusion Research’ Energy Policy Vol 17, No.1 (1989) p49

© Copyright 2001, Tyndall Centre.

You may copy and disseminate this information, but it remains the property
of the Tyndall Centre, and due acknowledgement must be made.

For further information on this subject please contact:

tyndall@uea.ac.uk

Tyndall Briefing Note No. 3 December 2001