Clean energy innovation in the Covid-19 crisis

Between 1995 and 2012, IEA member countries doubled their R&D spending on low-carbon energy, including demonstration projects. Improvements to clean energy technologies over this period helped renewable energy sources to outcompete fossil fuels in a growing number of situations today. 

Solar PV and wind power have each received more investment than any other electricity generation technology over the last decade. This was preceded by several decades of improvements in which R&D, business development and policy moved hand-in-hand. Technology improvements enabled more robust policy support – and vice versa. In particular, publicly funded R&D in countries such as the United States, Denmark, Australia, Japan, Germany and China played an important role in pushing forward technological frontiers at each stage of development.

Lithium-ion batteries have followed a similar pattern of development. The costs of both solar PV and lithium-ion batteries have fallen by nearly 95% since 1995. An estimated 60% of the cost reductions for solar PV resulted from R&D, both public and privately funded, rather than from “market pull” measures like preferential tariffs or requirements to include a certain amount of renewables in electricity supplies.

The IEA’s latest collection of data on public funding for energy R&D shows that, between 2012 and 2016, low-carbon energy R&D spending in IEA member countries was broadly stable.1 Annual growth, at 6% in 2019, was stronger than in 2016-18. But average growth since since 2016 has been lower than over the three-year period preceding the 2008 financial crisis.

Today, energy R&D spending faces pressures as government budgets come under strain from global economic turmoil, just as they did in 2008 and 2009. If annual growth remained at 2019’s rate of 6%, it would take 12 years for low-carbon energy R&D spending to double – just a few years fewer than it took for the doubling of spending to occur between 1995 and 2012.

Globally low-carbon energy technologies represent around 80% of total public spending on energy R&D, which grew by 3% in 2019 to USD 30 billion. However, the share of GDP represented by overall public spending on energy R&D has remained fairly constant over the last decade. Other public research objectives, such as health and defence, receive around five times more R&D funding than energy.

The Covid-19 pandemic doesn’t change the urgency of tackling the world’s climate challenge. While near-term responses to the Covid-19 crisis have understandably focused on mitigating health, employment and liquidity risks, attention is now turning to the speed of the recovery, the creation of new jobs and the future shape of the economy. New players with new ideas aiming to displace high-carbon producers and to scale up quickly may find a supportive environment if they are able to enter the market at the right moment. Economic stimulus plans now being proposed in countries around the world offer a once-in-a-generation opportunity to boost clean energy innovation. Many of the sectors that are critical to achieving net-zero emissions have investment cycles of many decades, so there is no time to lose.

A survey by the Smith School of Enterprise and the Environment in mid-2020 found broad agreement – among 231 finance ministry officials, central bank officials, and other economists from 53 countries including all G20 nations – that “clean energy R&D” and “clean energy infrastructure investment” score highest among various stimulus spending options for both positive impact and long-run multipliers.

The evidence suggests that clean energy technology innovation brings particular economic benefits, as well as being essential for the shift to more sustainable energy systems. One study of the automotive sector finds that clean energy innovation is more productive in terms of its ability to stimulate knock-on inventions than innovation activity directed to incumbent technologies. While the macro relationship between jobs and R&D expenditures is complicated, other studies suggest that R&D that supports new high-tech products is correlated with increased employment.

In the immediate future, the world’s capacity to bring new technologies to market will be weaker as a result of the disruptions caused by the pandemic. Market and policy uncertainties threaten to reduce the funds available to entrepreneurs, including via sales revenue. An IEA survey reveals that companies that are developing net-zero emissions technologies consider it likely that not only public R&D budgets but also their own corporate R&D budgets will be reduced. It should be noted, though, that there is little sign of companies that have made commitments to reduce their emissions intensity and test new energy technologies seeking to back away from those commitments. The latest data on early-stage venture capital funding, which supplies valuable resources to high-risk emerging technologies, shows a 30% drop in activity for clean energy technology deals in the first half of 2020 compared with the same period in the two previous years.

It is important not to lose momentum. With reduced corporate capital expenditure and R&D budgets, major demonstration projects could run aground or face delays. Emerging economies like Brazil and India, which have recently been raising their ambitions to develop indigenous clean energy technologies, may suffer setbacks unless they can tap into additional budget resources. These countries are identifying specific technology needs for their societies and climates that are not being addressed by companies and researchers in other countries. A prolonged downturn in any country would also carry the risk of the loss of highly skilled and highly mobile staff. More generally, human capital investments in the clean energy space could depreciate.

Governments around the world, faced with the predicted severe negative impacts of the 2008 global financial crisis, introduced wide-ranging economic stimulus packages by 2009. Among these, several major governments with sufficient economic resources chose to channel money into clean energy innovation. The rationale was generally to pair short-term stimulus measures with longer-term investments in increased productivity and technologies that could reduce CO₂ emissions once the economy recovered.

Between them, nine countries doubled their clean energy R&D and demonstration spending between 2009 and 2011, compared with between 2006 and 2008.2 This added over USD 6 billion per year to their aggregate spending over the three-year period from 2009. The Covid-19 pandemic is more global than the 2008-09 financial crisis, with China’s economy harder hit than it was a decade ago. If all countries doubled their clean energy R&D and demonstration spending today, it would add USD 25 billion per year.

The largest and most wide-ranging example of this approach during the 2008-09 crisis was the 2009 US American Recovery and Reinvestment Act, which allocated USD 7.5 billion to energy R&D and major demonstration projects. The Recovery Act made a notable contribution to the development of lithium-ion battery technology. The funding it provided for US battery R&D funding represented a significant increase in global R&D at a time when electric vehicles were primed for market entry but needed better batteries, and when the United States produced less than 2% of the world’s batteries for hybrid vehicles.

With new battery designs, the cost of electric vehicle batteries fell by 70%, and the number of electric cars sold in the United States rose from 1 500 to 114 000 between 2008 and 2015. By no means can all of this be attributed to the Recovery Act, but there is no doubt that the sector benefited from the timely allocation of resources to different parts of the value chain, not just R&D. As the IEA has noted elsewhere novel electric vehicle battery designs and electrolysers for hydrogen may present a similar opportunity today.

However, the funding increases introduced in 2009 were not all long-lasting. In the four key technology areas of CCUS, bioenergy, hydrogen and electrification (via power storage and smart grids), which are critical for achieving net-zero emissions, funding dropped off sharply. Sustainable funding that allows research programmes to ramp up and keep innovators engaged in multi-year projects should be an important legacy of a clean energy innovation stimulus today.

The composition of energy R&D is at least as important as its scale. Unfortunately, public energy R&D spending is not well-aligned with the technology areas that are key priorities for achieving net-zero emissions. Of the government funding that goes to applied research in specific technology areas, crucial areas such as electrification, CCUS, bioenergy and hydrogen receive three times less than low-carbon power generation and energy efficiency. Technology innovation in those less-funded areas is still desperately needed, since they are critical for decarbonising sectors such as long-distance transport and heavy industry where achieving net-zero emissions will be most challenging.

More than 120 governments around the world have formally discussed implementing net-zero emissions targets by 2050, of which around 20% have formalised these ambitions in policy documents, legislation or laws. Many companies across the energy sector and beyond made similar pledges. For those governments aiming to achieve net-zero emissions goals, and others seeking to boost clean energy technology development in general, the IEA proposes five key innovation principles.

1. Prioritise, track and adjust. Review the processes for selecting technology portfolios for public support to ensure that they are rigorous, collective, flexible and aligned with local advantages.
2. Raise public R&D and market-led private innovation. Use a range of tools – from public research and development to market incentives – to expand funding according to the different technologies.
3. Address all links in the value chain. Look at the bigger picture to ensure that all components of key value chains are advancing evenly towards the next market application and exploiting spillovers.
4. Build enabling infrastructure. Mobilise private finance to help bridge the “valley of death” by sharing the investment risks of network enhancements and commercial-scale demonstrators.
5. Work globally for regional success. Co-operate to share best practices, experiences and resources to tackle urgent and global technology challenges, including via existing multilateral platforms. 

These principles primarily address national policy challenges in the context of global needs, but are relevant to all policy makers and strategists concerned with energy technologies, transitions and resilience. Maintaining and increasing clean energy R&D spending as a response to the Covid-19 crisis is a key element of this approach. We recommend that this be coordinated with improved priority-setting to select stragic technologies and ensure efficient uses of funds by mobilising the private sector and working internationally.

The IEA’s recent Energy Technology Perspectives Special Report on Clean Energy Innovation provides insights into the types of technologies that might help accelerate innovation timescales as well as quantifying the market opportunity for successful innovators. It complements the World Energy Outlook Special Report on Sustainable Recovery, which provides a plan for the next three years enabling governments around the world to boost their economies, create millions of jobs and put global greenhouse gas emissions into structural decline.