Commentary: Declining energy research budgets are a cause for concern

16 October 2017

Energy research, development and demonstration funding into energy efficiency and renewables has risen dramatically since 2000, overtaking the shares of both nuclear and fossil fuels (Photograph: Getty Images)Energy research, development and demonstration funding into energy efficiency and renewables has risen dramatically since 2000, overtaking the shares of both nuclear and fossil fuels (Photograph: Getty Images)

The authors of this commentary are Simon Bennett, IEA Energy Technology Analyst and Remi Gigoux, IEA Energy Data Manager.

Investment into energy research, development and demonstration (RD&D) has delivered crucial breakthroughs that have contributed to an increasingly sustainable, accessible and affordable global energy system. But despite this success – as well as repeated calls by governments to specifically increase clean energy R&D spending – public and private investment into energy R&D has been declining.

Preliminary data for 2016 show that the total public RD&D budget of IEA member countries was $16.6 billion. While these funding levels are among the highest since 1974, accounting for inflation and relative purchasing power, this represents the fourth straight year of decline. Companies are also spending less than they were three years ago. This is cause for concern.

 

Note: Spike in 2009 reflects stimulus funding following the financial crisis. Of this, most was allocated to demonstration-scale projects in the United States

The IEA RD&D database allows us to look back to 1974 and track a series of trends in spending by technology – specifically, two shifts have occurred. First, in the 1980s and 1990s, very high shares of funding allocated to nuclear gave way to more spending on fossil fuel technologies, mostly relating to coal. Then since 2000, energy efficiency, renewables and cross-cutting technologies have risen dramatically to displace the shares of both nuclear and fossil fuels.

In 2016, energy efficiency topics represented 21% of the total, while renewables represented 19%. Transport technologies are the biggest recipients of efficiency research funds, while bioenergy and solar get the bulk of renewables funding. This kind of funding has delivered some of the crucial breakthroughs leading to the incredible cost reductions we’ve witnessed in technologies like solar and LEDs.

 

Just two countries, Japan and the United States, account for half of the total spending on energy RD&D. Japan allocated 12% of its total RD&D budget to energy, compared to an average of 4% across IEA countries. However, when the budgets of the European countries that are in the dataset are combined, their contribution is equal to that of the United States and greater than that of Japan.

Although China’s RD&D spending statistics are not published by the IEA, we estimate China’s public funding for energy RD&D to be lower than that of the United States but higher as a share of GDP. When state-owned enterprise (SOE) budgets are included, the total is likely at a similar level to US spending. In World Energy Investment 2017, we found that China’s public energy RD&D budget represents around 0.1% of GDP (including SOE spending), placing it near the top of our dataset, alongside Finland and Norway.

While governments have a key role in shaping energy markets and ensuring that the direction of technological change is in line with society’s goals, the private sector can often be better placed to identify the best-performing innovations. The good news is that in our study of the publicly reported research spending of corporations, we found that those companies active in energy sectors are spending more in total on energy research than governments. Most of the companies are headquartered in IEA member countries.

But, as we noted in Tracking Clean Energy Progress 2017, the sectoral splits are different between the public and private sectors. While governments are spending more on energy efficiency and renewables, the private sector is spending more in the oil, gas, networks and utilities sectors. This explains why corporate energy research spending has also declined in recent years, as cutbacks following the sharp oil-price drop knocked out $3.5 billion from the research budgets of oil and gas companies since 2014 ­­— more than Japan’s total public energy R&D budget.

The increase in spending by companies active in clean energy sectors has not compensated for this drop. As discussed in the newly released IEA Insights Paper "Early-Stage Venture Capital for Energy Innovation" and a previous commentary, venture capital funding is successfully propelling new energy software technologies forward, but the risks associated with the early development stages of hardware technologies are often considered too high for the private sector.

 

Note: Sample includes some SOEs. Classifications are based on Bloomberg Industry Classification System. R&D is allocated according to shares of revenue per sector for companies active in multiple sectors. Clean energy includes renewable energy, electric mobility, electricity storage, nuclear, LEDs and smart grids. Thermal power includes original equipment manufacturers (OEMs) of power plant equipment for fossil-fuel fired generation.

Accelerating energy innovation is a complex task that requires coordination between public and private sectors and regular adjustment to new developments, especially at a time of rapid change in digital technologies. We have seen that international coordination is possible: Mission Innovation and the IEA Technology Collaboration Programmes are leading the line in this area. Global economic competition can complicate such coordination, but differences in national visions of the future should be embraced. They are sources of diversity that will enrich the pool of energy technologies from which investors can select.

In addition to trying to maintain and raise research budgets, governments can use existing funds to target key research gaps. They can also build capacity to ensure that the outputs of innovation policies, as well as the investments, are being tracked for better policy making. The IEA will continue to lead the way with its efforts to compile and disseminate reliable energy RD&D statistics.