In thinking about a new focus for U.S. energy policy over the next few years, A Business Plan for America’s Energy Future, published last June by the American Energy Innovation Council (AEIC), makes for a good read.  The Business Plan proposes a number of interesting ideas with respect to national energy policy, the most compelling of which is that the federal government should spend $16 billion per year on energy R&D.

The AEIC makes a very good case for why R&D spending on energy technology is essential to American security and economic health.  It points out that R&D expenditures in the energy sector run at about 0.3% of sales, compared to 7.9%, 11.5% and 18.7% of sales in computers and electronics, aerospace and defense and pharmaceuticals, respectively.  Today the federal government spends only about $5.1 billion on energy R&D out of a total budget of $3.6 trillion.  Even the $16 billion annual budget proposed by AEIC is dwarfed by the more than $300 billion spent each year on imported petroleum, a commodity that new, domestically-generated energy technologies might one day be able substantially to replace.

The AEIC attributes the deficiency in energy R&D spending to the unusually long life of energy assets (often more than 50 years for power plants) and to the high levels of capital investment generally required for energy projects, which discourages traditional venture investment.  The AEIC might also have mentioned that much of the U.S. energy sector (in particular electricity) is highly regulated and is expressly regulated for the purpose of minimizing short term energy costs and maximizing near term reliability.  This is to some extent the same phenomena as the quarterly earnings mania on Wall Street, which has for years depressed R&D spending in corporate America, but on steroids.

As with all good ideas about spending more money on energy technology, I am reminded of the joke about the physicist, the chemist and the economist stranded on a deserted island trying to figure out how to open their last can of tuna fish (the punch line, of course, being the economist saying: “Assume a can opener!”).  However much a long shot adding $16 billion to the federal energy budget might have seemed last June, it seems outright fanciful today.

So where is the can opener?  It is almost certainly not in the federal budget.  But the can opener might be found in modifying the regulatory incentives that have done more than their fair share to create the problem in the first place.

The development of new energy technologies are important precisely because those technologies are necessary to ensure the reliability of energy supplies in the United States long term.  Protecting the reliability of the interstate power systems falls squarely within the jurisdiction of the federal government under the Federal Power Act and under Article I, section 8, paragraph 3 of the U.S. Constitution (for those with new-found interest in that document).  Accordingly, if the Congress makes a finding that a certain level of energy R&D expenditure is necessary to protect the reliability of interstate power supplies, it can simply require utilities and other grid operators to spend a certain minimum percentage of their electricity revenues each year on qualified energy R&D projects.

Holding utilities and grid operators responsible for making a minimum amount of energy R&D investments each year is not quite what the AEIC had in mind (the AEIC suggested running the federal R&D budget through a small number of “centers of excellence”).  But it would have several advantages.  First, it would leave any new intellectual property rights developed by those expenditures in the hands of the utilities and grid operators that paid for their development.  These rights might one day prove to be commercially valuable.  Leaving them in the private sector leverages the incentive for profit, which is wholly absent in government-funded research. 

Second, because many of the entities that will be subject to an R&D mandate are entities regulated by state and local authorities, which have strong interest in local economic development, it is probable that the new R&D expenditures will be invested broadly around the country.  This is a good thing, not a bad thing.  While it will be necessary for FERC to define carefully what constitutes a qualified R&D expenditure, and perhaps even to set performance return thresholds on R&D investments, it is far from clear that the best interests of long term energy security are necessarily served by having more money chasing the latest hot deal in Silicon Valley or funding new programs in the national laboratories.

Finally, requiring mandatory energy R&D expenditures by grid operators, rather than running R&D dollars through the federal government, will more directly benefit consumers.  Although an R&D investment requirement will negatively impact short term electricity rates, the consumers paying those rates will, through their local utility, have at least an indirect ownership stake in any new technology that their increased rate payments help develop (the value of which might be used to reduce future electricity rates). 

Increasing expenditures for energy R&D is critical to the national security and long-term economic health of the United States.  It is not necessary, however, that all those expenditures run through the federal government.  What is important, however, is that those expenditures start being made, and soon.

How’s the tuna fish?