How can we transform the energy sector?

Steven Koonin explains why our energy sector must change

There are compelling reasons to improve our energy system – to make it more accessible, affordable and reliable, and to reduce its environmental impact. But energy change is often sluggish, especially as investing in energy infrastructure is expensive. A single power plant is a multi-billion dollar investment with a lifetime of decades.

Governments, citizens, private industry and NGOs all have different interests when it comes to energy. And since the consumer cannot distinguish among products from different sources, suppliers see incumbency as a considerable advantage.

Many cite the Manhattan Project and “Moon Shot” as potential models for how government could help transform the energy sector. However, those projects had a single focus, were funded entirely by the government and had little impact on the daily lives of citizens. For energy transformation, we need not only scientific innovation, but also large-scale deployment.

In nations where free enterprise and market systems dominate, transformation will be achieved only with the participation of private industry. To make the necessary investments, industry must balance several decades of return against a multitude of risks. Those risks, combined with the size of capital required and the commoditization of power and fuels, make technical conservatism the norm.

Venture capital has both the inclination and the capacity for high-risk, high-reward investment. But it does not have the funds or business model required for the scale of deployment – or duration of investment – required for true change.

Governments can mitigate the risk to investment in new energy technologies. Loan guarantees and tax credits reduce capital risk for technologies that are nearly ready for investment by large corporations. Government can also reduce capital risk by investing in research and technology development.

Blurring the line between government-funded research and industry can mitigate technology risk. The US Department of Energy has several projects in this area, including the Energy Frontier Research Centers, Energy Innovation Hubs and Advanced Research Projects Agency-Energy. Government assets in computer simulation and test beds can also be used to demonstrate new technologies.

Transformation of our energy system is both necessary and difficult. To succeed, we must acknowledge that its scale presents unique challenges that require industry participation, and the need to shape government policies according to the risk-reward calculations at the core of the private sector.

Read the Energy Vision 2013 Energy transitions: Past and Future Report

Author: Steven Koonin is Director of the Center for Urban Science and Progress at New York University and was a member of the World Economic Forum’s Global Agenda Council on Energy Security 2008

 Image: Power lines are seen in Sydney Australia REUTERS/Tim Wimborne