For a preview of some of the issues the paper will cover, take a look at Moynihan’s recent post on the NDN blog, “Removing Roadblocks to the Growth of Renewables“:

New York City – On Friday, the US Energy Information released new monthly statistics for renewable energy output as well as output of traditional forms of power.  The good news is that renewable energy in May, the latest month for which statistics have been compiled, is at its all time highest level, accounting for 13% of total power.  The bad news, however, is that the vast majority of this, about 9.4% comes from traditional hydropower.  The other renewables, wind, solar, biomass and geothermal accounted for just 3.6%.   Wind accounts for 1.8, biomass, 1.3%, geothermal 0.4% and solar 0.3% of the total.

All of the sources of renewables grew, but the growth rates were modest.  Wind grew year-on-year by 12.5% and solar by only 3.5%.  These growth rates might be passable for mature technologies with a huge starting base.  However, for comparatively new technologies with a tiny denominator, these growth rates are not impressive.  True, the data do not reflect the full force of the Investment Tax Credit (for solar installations) extended last fall and the American Recovery and Reinvestment Act passed this winter–because of the lag in the data.  Still they tell at best a story of an industry surviving the recession.  They do not tell a story of economic rebirth based on the promise of a low carbon future.

There are reasons to hope clean energy would be growing much faster than these rates–the goal of lowering greenhouse gas emissions–essential to addressing climate change–and the goal of creating a new wave of clean technology-driven growth.  (The goal of energy security is less dependent on renewable technologies since coal is present in the United States but is nonetheless also served by replacing oil in our nation’s energy mix.)

However, there are also reasons to expect clean energy to be growing far faster than it is: the declining cost curves of renewables relative to fossil fuels, the large subisidies the government has put in place and the huge push America is making, from the President’s speeches to the T.Boone Pickens Plan for energy independence on down.  In many states, renewable energy is even mandated through a Renewable Electricity Standard.  Looking abroad, Germany produces 7% of its power from wind, about four times what the US does and Spain’s solar power capacity grew 364% in 2008.  Now that is the type of growth needed to have a real effect!  The fact is US growth rates in renewable industry are not meeting reasonable expectations for clean energy growth, let alone desirable targets.

I have been studying the question of why clean technology is moving so slowly into the marketplace in the United States and my research suggests that adoption of clean technology and renewable energy must be about more than pricing and incentives.  It is about decisionmaking and removing obstacles to the deployment of clean energy.  These obstacles are present, once you peer into the complex world of the electricity industry,in a host of non economic barriers to implementation.

To understand why clean energy is not–even with large incentives in place–displacing dirtier forms of energy, it is important to recall the extraordinarily complex nature of the industry.  Like all large industries, the electricity industry has incumbents.  These incumbents–unlike say car manufacturers or computer companies, are protected by regulation.  During the 1990s, the industry was partially deregulated so that market forces were introduced in some parts of the industry in some regions.  However, the work of regulatory reform proceeded only part way leaving the industry in a sort of limbo  Today, some regions of the country have wholesale competition.  Others have limited retail competition.  Still others have wholly vertically integrated companies supplying their customers with soup to nuts service unchanged from a half century ago.  And there is limited trade in electricity, this in an era, when frozen dinners served in the United States are made in Thailand and fresh flowers cut in Bolivia.

Indeed the electricity industry is quite rare today in remaining geographically divided.  With some exceptions it is illegal for a utility in one region to sell to customers in another.  There is effectively no such thing as national competition. There are, of course, many precedents for these legalized restraints on trade.  Banking used to be organized this way prior to reforms in the 1980s and 1990s.  Telecommunications after the breakup of Ma Bell but before the 1996 Telecom bill and development of national communications services was similarly organized by region.  In the case of electricity, besides the legal restraints on trade there are major physical restraints in the form of lack of capacity on the grid to move power where it is needed.

The absence of universal market allocation of power, means that decisionmaking–of what types of power to buy, what types of clean technology to implement and what types of infrastructure to build–is left, frequently to a small group of decisionmakers who are also incumbents and have a rational bias towards decisions supporting their incumbent position.  A transformative technology, for example, could reduce the value of their legacy assets.  Building a new transmission line to connect wind power to the grid, may make a plant they own obsolete.  It may therefore be entirely rational for them to discourage rather than encourage the deployment of new technology.

It would be one thing if the decisionmakers were acting on their own.  However, typically they make decisions under the rate base system that provides a guaranteed rate of return on anything they can place in the rate base.  This would ordinarily incent them toward overinvestment.  However, since regulators oversee these rate cases and generally try to lower costs, the decisionmakers at utilities have a conflicting mandate to gain a high rate of return but also keep costs down.  This can lead to a bias toward investments that pay off immediately and against investments that pay off longer term.

The upshot is that getting the type of growth rates of renewables needed to unlock the economic and social potential of clean energy is likely to take more than economic incentives and mandates.  It may well require reform to remove obstacles to the deployment of new technology.

The energy bills now working their way through Congress contain some measures to address these problems.  But my research suggests more work needs to be done.

Call it Competitiveness 2.0.  It is the subject of a penetrating article in the current Harvard Business Review by two Harvard professors, Gary Pisano and Willy Shih entitled “Restoring American Competitiveness: Why America Can’t Make a Kindle“. The professors examine a wide range of technologies from computer equipment to software to clean technology and find America at a growing competitive disadvantage. Both the data they cite and the case studies they include should serve as a wakeup call to anyone thinking about clean technology and the future of the US economy.

While innovative ideas continue to flourish in the United States — think Twitter, Ning and Facebook–the US has become a technology laggard among the OECD countries in critical measures. The US trade deficit is old news but the authors point out since 2002, the US has been running a deficit even in high tech goods and services. The main export of the US is capital.  And there are precious few bright spots in the technology firmament.

In the case of the Amazon’s Kindle reader, which the authors examine in detail, though engineers in California designed the product, there is simply no US capacity to make the components.  (If the US lacks the capacity to make a Kindle could it make a military computer in a pinch?)  In aircraft, Boeing continues to lead the world but it now relies on a network of global suppliers and has cut its American workforce.  Managing this complex supply chain led the company to delay delivery of its Dreamliner.  All but the highest end computers are now made abroad. And even complex software tasks, from writing software to using it for engineering, are moving overseas.

In clean technology, leadership in battery technology lies abroad. GM’s Volt, scheduled for introduction next year, for example, will source batteries from South Korea. While a few companies such as Tesla are developing advanced auto technologies, the US lags Asian and European companies in hybrid and other technology.  With most growth in the world’s auto sales likely to take place in China, India and the developing world, companies like Tata and Chery (originally a Chinese knockoff of Chevy) will have a homefield advantage. Chinese, Japanese and Korean companies dominate all PV production of solar cells except in thin films — the most advanced and promising technology where US firms still lead the way. In smart grid technologies, US companies face roadblocks in the form of an excessively complex and highly regulated utility industry.  Installing new smart grid meters and retrofitting old buildings only gets you so far in terms of new jobs and new businesses.  All told, while the US has the potential, thanks to our still- unmatched system for financing innnovation, to develop the technologies of tomorrow we are, all too often, behind in the technologies of today.

What are the sources of our competitiveness problem? America continues to lag in primary and secondary education. Our universities may be the best in the world, but most of the spots in top PhD programs now go to more motivated students from overseas.  (Community colleges are a US strength that can be scaled as Rob Shapiro has argued and the President recognized today in calling for their expansion.)  The relentless search for low wages continues to send capital out of the US. American firms still can receive tax breaks for moving jobs overseas. Short term thinking, driven by the next quarterly results dominates corporate strategy.

On the macroeconomic level, the US continues to stress consumption over production. This bias, which derives from a strong dollar that keeps imports cheap as long as others lend us the money to buy them, encourages overseas instead of domestic production. A weaker dollar and shift toward a producer and investment-led economy would temporarily lower standards of living, but may be what is required to create the foundation for long term growth. Recently, former NEC head, Laura Tyson, proposed just such a shift in national priorities. While these are complex questions, a real debate over our priorities — toward consumption–or production is in order.

In the 1990s, the US made major strides in reversing its competititiveness deficit so that by decade’s end it was leading the global economy. However, as Pisano and Shih make clear, those strides were temporary and the problem has returned.  The competitiveness issue, the authors show, is far more problematic today than  at any time in American history.  And if this issue is not satisfactorily addressed, the US will not see wages, standards of living or other metrics of welfare rise. As NDN has long argued and as the HBR authors note as well, stagnant wages combined with rising expectations led to the absurd borrowing that precipitated the latest financial crisis.

In short, if the US is to reap the economic rewards of a clean technology revolution, we need to seriously examine our competitiveness posture and take the steps needed to put us back on track to leading, not lagging the global economy.

All of this leads to my topic for today: making good on the promise of clean technology. Now one of the hottest areas in Silicon Valley and an area that the Obama Administration believes is key to powering prosperity, clean technology has — as John Doerr has said — more potential for wealth creation than information technology. Yet despite numerous technology breakthroughs, the clean energy and technology space has yet to generate the type of home runs on a company level or growth on an economy-wide level needed to reinvigorate the American economy and get wages moving upwards again.

In my view, there is no question that innovation is the key to America’s economic future. The wealthiest country in the world cannot compete with low-wages countries on labor costs. To sustain high wages, our people must create new industries in which competition is based on new capabilities and, in effect, scientific magic, not on who can make widgets for less. We have the best scientific infrastructure and system for financing innovation on earth. Nonetheless, as Mandel points out, our system has not delivered on an economy-wide level for the last decade.

It is tempting to blame this on the policies of the Bush Administration. And the Obama Administration has begun to reverse a reliance on financial engineering, as opposed to real engineering, to get us back in the business of creating new products. However, to really get innovation back into high gear, I believe more steps are needed.

Within clean technology, a very promising area of innovation is the smart grid. However, virtually none of the money for smart grid included in the ARRA bill will go to young entrepreneurs — burrito-eating Stanford grads, as Doerr once described them. Because of a 50% cost-sharing requirement and large average size for grants, most will go to large regulated utilities. Moreover, the entire clean energy industry is hampered by a key difference between the energy industry and, say the Internet industry: the presence of incumbent players with an interest not in innovation but rather in preserving incumbency.

Many young clean technology companies find themselves in the role of selling to a small group of customers, most heavily regulated and unusually conservative. In a given geographic region, they may therefore have only one customer, creating a so-called monopsomy. Monopsomies, the flip side of monopolies, provide exceptional buying power to a single gatekeeper who can, if desired, not buy a product at all. A real life example of a monopsomist is a coffee buyer in a remote region who may have virtually unlimited power over small growers. Oil companies, similarly, enjoy government tax credits, market power and other incumbent advantages that can work against companies offering alternative technologies. So long as these sorts of gate-keepers and roadblocks to innovation exists, clean energy will fail to realize its promise.

What is the way around roadblocks to innovation in the energy sector? The answer, broadly speaking, is to get the end user or consumer involved.

The consumer is a great arbiter of product quality. Unlike a middleman, incumbent or gatekeeper, the consumer’s highest priority is features for money expended. In software, computers, electronics and sectors where the consumer is empowered, the consumer has driven innovation.

Two policy ideas stand out as ways to get the consumer involved in energy decision making. First, the smart grid itself, if developed in an open way, will drive innovation buy allowing software developers, producers of services and others to build products around an open standard. On the other hand, the smart grid, if developed in a closed or proprietary way, will merely perpetuate the market power of insiders. The key is to set a standard that allows plug and play capability so that entrepreneurs can develop products for customers around it. Just as coffee consumers, once informed about fair trade, have begun to buy fair trade coffee, consumers, if given the choice, will buy products and services around the grid based on their preferences.

Second, it is time to revisit the issue of electricity reform to offer greater choice to consumers. Electricity reform began in the 1990s but came to a halt. Since then, we have learned what structures make markets work best and competition should be extended to the consumer level.

Finally, the government should be more flexible in how it supports research and development for clean technologies, to make more money available to smaller, more nimble firms as opposed to entrenched incumbents. While it may be possible for governments playing catch up to to bet on strategic industries, as Japan did after World War II, when it comes to innovation, picking winners should be avoided. No single analyst or committee, no matter how smart, can substitute for trial, error and the verdict of the marketplace.  However, government can encourage open standards and a level playing field to encourage numerous solutions to problems.  And by making money generally available not only to large players but to small ones, it can help rekindle innovation.

These three steps will help accelerate innovation in the clean technology space. And innovation is what is needed to raise wages, create jobs and get America’s economic engine hitting on all cylinders once again.