Is Amber Rudd’s energy policy ‘reset’ innovation-friendly?

by Will McDowall and Andrew ZP Smith

Innovation is one of those uncontroversially good things that politicians love to champion. For those worried about the economy, innovation is agreed to be a fundamental driver of long-term economic growth. For everyone worried about the environment, innovation is crucial for decoupling that growth from environmental damages, and achieving the deep reductions in emissions that are necessary.

So far, so much agreement. But academics, policy analysts and commentators have often disagreed about the detail of how best to drive innovation, particularly in clean technologies. There are some economists who argue that, beyond some support for basic R&D, government should be involved as little as possible. They argue that innovation is too uncertain for governments to engage in: it’s private actors that should take on the risks and rewards of developing the technologies and systems of tomorrow. After all, who other than businesses can really know what consumers will demand?

It’s presumably a belief that government should ‘get out of the way’ and let competitive forces to do the job that led Amber Rudd to declare recently that that energy sector privatisations and deregulations of the 1990s “encouraged innovation”. Unfortunately it seems Amber Rudd was repeating a highly misleading classical mantra. Certainly, privatisation injected innovation in business models and spurred investment in gas plants. But on practically any other measure, energy innovation fell dramatically following privatisation. Patents, research publications, R&D spending: all collapsed, as the previously nationalised energy companies closed down their research labs and focused on nearer term profits. Leaving energy innovation to the competitive market was a comprehensive failure of those 1990s reforms.

Our own research, and that of many others, makes clear that for innovation in general—and energy innovation in particular—a role for government is essential, since the pay-offs of investment in innovation are hard to monopolise, and they are often on a longer time scale than investors are willing to accept. In the energy sector, private investment into R&D tends to be particularly weak: measured as a proportion of total turnover, energy sector R&D spending is around a 20^th of that seen in highly innovative sectors like IT and Pharmaceuticals. Competitive markets will deliver energy innovation along established, business-as-usual trajectories, as with fossil fuel extraction (deep water oil drilling or oil sands refining come to mind), though even here government support has often been crucial. But strategic investment and direction is critical to enable the innovation that is required for decarbonising the economy, and to do so in a way that delivers the best economic outcomes for the UK.

All of this is particularly important for offshore wind.

The UK has pioneered the offshore wind industry we see today, driving into deeper waters, further offshore, and to larger scale than any other country. Coming from a weak starting point, the UK has established a large and growing domestic supply chain, bringing more and more of the economic benefits of offshore development into the UK economy. But offshore wind is still far from mature. While early turbines were essentially onshore models planted in the inter-tidal area, the industry today is seeing huge innovation across the supply chain, from the heavy equipment of installation vessels and turbine foundations to the high tech design of software control systems.

It is no exaggeration to say that the UK’s investments in offshore wind have revolutionised the prospects for offshore wind globally. The UK accounts for only 2% of global emissions, and in that sense our emissions reductions are a marginal part of the global story. But contributions to real technology progress, as we have achieved in offshore wind, are potentially just as significant.

As Rudd and her team develop the policy reset, we suggest three key lessons to ensure that innovation in offshore wind continues to be promoted, and not stalled:

• Focusing on cost reduction above all else can backfire. In the 1990s, the UK support mechanisms for onshore wind were highly competitive, and designed to yield the very cheapest and most cost-effective projects. This provided strong incentives for wind companies to innovate to cut costs: but the industry and technology were simply not mature enough. The pressure on costs stifled the “nursing” and “bridging” markets that are essential for the establishment of a new industry that is characterised by significant public goods. As we have argued above, offshore wind is maturing rapidly, but it is not yet out of that critical bridging phase. Certainly, it is vital to ensure that pressure to reduce costs is built into support mechanisms: through competition and through a clear process for support degression. But prioritising cost reductions above all else will hamper investment and industrial development.

• Maintaining confidence in the direction of travel is critical to success and to cost reduction. Investors and project developers are increasingly concerned that the priorities are shifting away from offshore wind, despite Rudd’s protestations to the contrary. Certainly, the government’s assault on existing renewable energy support measures (for biomass, solar and onshore wind), and talk of an ill-defined ‘reset’, have rattled the sense that the UK is committed to developing a renewable energy system. Yet it is clear that confidence drives investment and supply-chain development. For the UK, this is particularly important: confident long-term signals will mean that the UK role in the European offshore wind industry will continue to grow, bringing economic benefits alongside carbon reductions.

• Both deployment and R&D support matter. At a time when public finances are under pressure, some have argued that it would be a better use of money to direct it towards more basic energy research. There is certainly a case for more energy R&D funding. The UK spends relatively little on energy R&D, both in terms of international comparisons and with respect to our level of ambition for decarbonisation. But innovation requires learning-by-doing as well as research: they are complements, not substitutes. While we can argue about the precise balance of the two, it is clear that if the reset results in an investment hiatus, the damage to supply chains and real world learning will not be offset by technological silver bullets emerging from the lab. And as has recently been pointed out, R&D results take time to mature, which means that when we are looking to deliver solutions in ten years’ time, these won’t come from diverting funding from deployment into basic research on blue-sky technologies today, but in evolving and refining technologies that have already passed proof-of-concept.

It’s worth remembering why the UK got into offshore wind in the first place. Meeting energy policy goals and decarbonising the economy required success in at least two of four big challenges: only nuclear power, offshore wind, CCS and energy efficiency each have the potential to contribute several tens of gigawatts of zero carbon energy supplies in Britain. All have their drawbacks, but it is offshore wind that has proved the easiest to deploy at scale in the near term.

As the direct result of strategic investments in offshore wind, Britain has a burgeoning offshore wind supply chain that has to date been willing to invest in novel processes and technologies, driving the innovation that the government is so keen to promote. Having made such progress, a badly handled reset could result in precisely the outcome that Rudd fears: expensive investments in offshore wind with neither the cost reductions nor UK supply-chain benefits that she hope the reset will achieve.

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Will McDowall is Lecturer in Eco-Innovation at the UCL Institute for Sustainable Resources and UCL Energy Institute

Andrew ZP Smith is a Senior Research Associate in Energy Policy, Systems & Modelling at the UCL Energy Institute