captured, leading to a suboptimal level of
investment.
Governments have a key role in correcting
these frictions and ensuring an optimal outcome
is realised. The issues of misaligned incentives,
the high risk of innovation, and changing
parameters of investment along the innovation
pathway are all frictions that can result in socially
beneficial innovations not reaching market
deployment. It is in governments’ interests to
help ease these frictions and help innovation
deliver the best societal outcome possible.
(2) Capital characteristics
The capital intensity of an asset is the capital cost of
developing a minimum viable commercial energy
business. This will tend to be low for modular
technologies, such as solar photovoltaic cells, and
higher for technologies that need to be deployed at
scale, such as nuclear power plants. High capital
intensity leads to greater financial risk and a longer
payback time. This can reduce demand; without
sufficient demand an innovation will not be profitable, even if it is successfully developed. This in
turn leads to less investment in innovation and
slower innovation overall. Capital longevity is the
useful lifetime of an asset—it can also reduce
innovation by causing lower turnover rates, creating fewer opportunities to learn by doing, and
generating less demand for new capital assets.
Power generation technologies generally have
high capital intensity and long capital longevity,
limiting the potential for experimentation and
slowing deployment rates. Government can provide support to overcome these barriers. The case
study of wind turbine development in the 1970s
provides an example of this. In Germany, the
emphasis was on developing very large turbines,
which had a high capital intensity but strong
economic potential. In Denmark, the government
wanted to accelerate innovation in wind turbines
and actively supported the development of
smaller turbines. These smaller turbines were less
complex than the large German turbines and the
capital cost was lower. This lower complexity
and greater number of opportunities to experiment reduced the risks that demonstration
turbines would fail and accelerated the learning
rate, which led to Denmark’s faster deployment
of wind power, establishing the industry rapidly
with the minimum viable product.
Another key trend in energy is the transition
towards decentralised energy, where technologies have smaller unit sizes. Since 2009, a period
characterised by increased small-scale investment, even the major markets have generally
seen increasing levels of investment. The lower
capital intensity of decentralised energy is
opening new demand avenues that increase
adoption rates, creating the necessary signals for
new innovation (Table 3 and Fig. 2).
2.2.2 Innovation Pathway
There are four stages that an innovation must
pass through before it can be marketed: R&D,
demonstration, introduction into niche markets,
and deployment. Different actors are present and
the relevant types of support vary at each stage.
In the early stages, funding and favourable loans
are the most important factors. When a technology moves beyond demonstration, market creation policies, such as support infrastructure and
public procurement, become the more common
options for policy interventions (Fig. 3).
(1) Challenges along the innovation pathway
The changing characteristics of each of the four
stages and fundamental market failures create
challenges along the innovation process. The two
main challenges that can hinder innovation are
misaligned incentives between actors at each
stage of innovation, and the increases in capital
requirements and risk as projects advance along
the innovation pathway.
First, misaligned incentives. Misaligned
incentives can result in innovations with positive
externalities being under-supported and socially
inefficient technologies surviving. Misaligned
incentives can lead to imitation, where
near-identical products are deployed in the market, which is wasteful for society. Imitations arise
when competing products are not interoperable
because they follow different standards or formats. This can be less efficient than a common,
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293
investment.
Governments have a key role in correcting
these frictions and ensuring an optimal outcome
is realised. The issues of misaligned incentives,
the high risk of innovation, and changing
parameters of investment along the innovation
pathway are all frictions that can result in socially
beneficial innovations not reaching market
deployment. It is in governments’ interests to
help ease these frictions and help innovation
deliver the best societal outcome possible.
(2) Capital characteristics
The capital intensity of an asset is the capital cost of
developing a minimum viable commercial energy
business. This will tend to be low for modular
technologies, such as solar photovoltaic cells, and
higher for technologies that need to be deployed at
scale, such as nuclear power plants. High capital
intensity leads to greater financial risk and a longer
payback time. This can reduce demand; without
sufficient demand an innovation will not be profitable, even if it is successfully developed. This in
turn leads to less investment in innovation and
slower innovation overall. Capital longevity is the
useful lifetime of an asset—it can also reduce
innovation by causing lower turnover rates, creating fewer opportunities to learn by doing, and
generating less demand for new capital assets.
Power generation technologies generally have
high capital intensity and long capital longevity,
limiting the potential for experimentation and
slowing deployment rates. Government can provide support to overcome these barriers. The case
study of wind turbine development in the 1970s
provides an example of this. In Germany, the
emphasis was on developing very large turbines,
which had a high capital intensity but strong
economic potential. In Denmark, the government
wanted to accelerate innovation in wind turbines
and actively supported the development of
smaller turbines. These smaller turbines were less
complex than the large German turbines and the
capital cost was lower. This lower complexity
and greater number of opportunities to experiment reduced the risks that demonstration
turbines would fail and accelerated the learning
rate, which led to Denmark’s faster deployment
of wind power, establishing the industry rapidly
with the minimum viable product.
Another key trend in energy is the transition
towards decentralised energy, where technologies have smaller unit sizes. Since 2009, a period
characterised by increased small-scale investment, even the major markets have generally
seen increasing levels of investment. The lower
capital intensity of decentralised energy is
opening new demand avenues that increase
adoption rates, creating the necessary signals for
new innovation (Table 3 and Fig. 2).
2.2.2 Innovation Pathway
There are four stages that an innovation must
pass through before it can be marketed: R&D,
demonstration, introduction into niche markets,
and deployment. Different actors are present and
the relevant types of support vary at each stage.
In the early stages, funding and favourable loans
are the most important factors. When a technology moves beyond demonstration, market creation policies, such as support infrastructure and
public procurement, become the more common
options for policy interventions (Fig. 3).
(1) Challenges along the innovation pathway
The changing characteristics of each of the four
stages and fundamental market failures create
challenges along the innovation process. The two
main challenges that can hinder innovation are
misaligned incentives between actors at each
stage of innovation, and the increases in capital
requirements and risk as projects advance along
the innovation pathway.
First, misaligned incentives. Misaligned
incentives can result in innovations with positive
externalities being under-supported and socially
inefficient technologies surviving. Misaligned
incentives can lead to imitation, where
near-identical products are deployed in the market, which is wasteful for society. Imitations arise
when competing products are not interoperable
because they follow different standards or formats. This can be less efficient than a common,
Special Report 3: A Study of China’s Technology Revolution
293