Why governments are necessary for technological innovation, development and deployment

Blog - April 21, 2016 - By Sara Hastings-Simon

Without government involvement, market failures will keep clean technologies from succeeding. Photo: Pembina Institute

The world is undergoing an energy transition. The potential for clean technologies to spur economic growth is clear. But, is government support needed or can we simply leave this opportunity to the market?

There are countless examples of innovation and common technologies that required government investment to grow to where they are today.  At the same time we must learn from past experience to ensure our money is spent well and ultimately delivers economic growth.

The typical stages of innovation — research and development (R&D), deployment/scale up, commercialization — must be considered separately. The challenges are different at each stage as is the support needed. R&D requires direct support to ensure sufficient investment.  Deployment/scale up requires critical market based government support to ultimately reach commercialization. 

Without government involvement, market failures will keep these technologies from succeeding.  This is particularly critical in the growing cleantech sector where a significant number of jobs and economic growth opportunities for Albertans and Canadians risk going unrealized.

Why government should pick

What is government’s role in advancing technological development and deployment? We can start by looking for parts of the development cycle, innovation and deployment, that the free market can’t address — so called market failures. These failures include poor R&D funding, bridging the “valley of death” on the road to commercialization, factoring in the true cost of carbon and the uneven playing field.

Lack of funding for R&D

Private companies have little incentive to invest in R&D because the full value of the research is unlikely to go to the investor — it can often be replicated or disseminated at much lower cost.

Bridging the “valley of death”

The “valley of death” is the gap in funding between R&D and commercialization preventing many promising clean technologies from reaching commercialization. One of the key steps is cost reduction from deployment – the learning/experience curve that all technologies go through where their costs are reduced dramatically just by making more of them.  This is a chicken and egg problem — the only way to lower costs is to deploy technology at scale, but without support the only way to deploy technology is to lower costs.

This deployment period is critical for clean technologies that have higher upfront costs but lower lifetime costs than conventional alternatives. It costs significantly more to put steel into the ground than build a phone app. Without government support innovators would be unable to scale and reduce costs to become competitive. 

Carbon not priced at true cost

The level of carbon price seen as politically acceptable is far below estimates for the true cost of adding carbon to the atmosphere on society. Rising carbon prices can help address the failure, but the carbon prices set in the near term necessitate additional support for technologies that seek to reduce carbon to reflect the true value they bring.

The uneven playing field

Energy incumbents hold a number of obvious advantages including subsidies, tax credits and other supports baked into the current system. In order to allow the market to function, the government must provide similar support for clean technologies.

These failures form a compelling case for government support in technology development and deployment. One need only look at successful technologies such as the internet and the computer industry — which enjoyed significant government support — to see how this works. Alberta Oil Sands Technology and Research Authority (AOSTRA) was set up to unlock the oil sands resource.  Roughly $1 billion was invested by AOSTRA, which ultimately led to massive private market investment — over $80 billion dollars in 2014 alone. 

The devil is in the details

Successful programs follow a clear set of rules to determine where and how to spend the money.  So, it’s important to keep four key rules in mind. First, differentiate between R&D and deployment. In the early stage, acknowledge direct government investment as the main source of funding. In later stage development and deployment, the government’s role evolves away from sole funder to support — but this support remains critical.

Second, specify outcomes, not approaches. Define an objective to achieve — e.g., an emissions target — and not a specific technological approach. This allows the market the freedom to find the best solutions.

Third, let the market lead. Later stage programs should require that private capital be invested as well while the government provides the additional support needed to get the new technologies to scale.  These include mechanisms like loan guarantee programs such as the US department of Energy Loan Programs Office (LPO). The LPO has a portfolio of over $30 billion, supporting more than 30 projects at companies including well-known clean tech innovators such as Tesla. The overall portfolio has generated more than $50 billion in total project investment, created 56,000 jobs in the US and earned $1.22 billion in interest vs. losses of $780 million. 

Fourth, use direct procurement. Governments can use their own purchasing power to create markets for technology and overcome the scale issue. This type of government led procurement has been used to deploy common technologies such as airbags and seatbelts that started with a large market in the US federal government fleet. 

What does it all mean?

Without government involvement, market failures will keep these technologies from succeeding.  This is particularly critical in the cleantech sector where significant jobs and economic growth opportunities for Albertans and Canadians risk going unrealized. Governments should follow key principles to ensure our money is spent well; but these principles are well understood and missteps can be avoided. It would be irresponsible for governments to refuse to play their role.


Sara Hastings-Simon

Sara Hastings-Simon is a senior fellow with the clean economy program, and is based in Calgary.


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