Breaking Down the Federal Clean Energy Innovation Budget: Deployment Incentives

This is Part 4 of a series of posts analyzing and detailing federal investments in clean energy innovation. Part 1 defined “clean energy innovation.” Part 2 broke down the federal clean energy innovation budget. Part 3 took a look at federal investments in clean energy demonstration projects.

For the last couple of years, the lion’s share of debate on U.S. clean energy policy has focused on encouraging deployment – or large-scale construction and installation – of low-carbon technologies. By significantly deploying clean energy technologies, supporters say, the United States can encourage integration of emerging technologies in an energy market dominated by entrenched fossil fuel interests, spur cost-cutting economies of scale, and get started on lowering greenhouse gas emissions in the process. However, others argue that there is a necessity to designing well-constructed deployment incentives aimed at directly spurring innovation to address climate change.

A Quick Typology of Deployment Policies

Federal clean energy deployment incentives can be made available through grants and other annually appropriated programs. For instance, the State and Tribal Energy Programs at the Department of Energy (DOE) deploy building efficiency and renewable energy technologies within communities. The New Energy Frontier initiative at the Department of the Interior (DOI) deploys renewable and energy efficiency technologies on federal lands.

While direct spending on deployment incentives of this type is typically minor in comparison to other direct spending programs, the Recovery Act significantly increased direct spending for deployment by funding the Advanced Battery Manufacturing Grants program, which awarded funding to projects that accelerated the manufacture and deployment of batteries for electric vehicles (see ARRA bar in figure below.)

More commonly, federal deployment incentives are driven by consumer and corporate tax credits, and through loan programs that help finance construction of large-scale technology installations. Investment in deployment programs was highest in FY2011 at $22.3 billion because of large tax and loan guarantee expenditures. In fact, the most significant deployment investment nearly every year between FY2009-2012 came from tax expenditures, which accounted for 80 percent of total investment in FY2010, 51 percent in FY2011, and 87 percent in FY2012.

Tax expenditures support a multitude of technology priorities including the production of low-carbon electricity, the installation of energy efficiency and renewable energy retrofits on homes and commercial buildings, and the production of low-carbon fuels. Many of the loan guarantee expenditures awarded during FY2011 were from the Recovery Act’s Title XVII Section 1705 Loan Program, which supported deployment of mainly solar and wind technologies.

Commercial vs. Emerging Technologies

An important distinction often overlooked in the clean energy deployment policy debate is whether public investment supports existing or emerging technologies. As the figure below shows, federal deployment investments are historically directed at supporting commercial off-the-shelf technologies (i.e. technologies that are readily available in commercial markets), with loan guarantees and tax incentives, rather than emerging technologies (i.e. nascent technologies being introduced to commercial markets for the first time).

This difference is particularly important in determining whether deployment policies are linked to research investments and provide a strong pipeline for emerging technologies to reach market. Today, most clean energy technologies are not cost- and performance- competitive compared to conventional energy technologies.

By deploying these technologies at a larger-scale, the nation is focusing its resources on making clean energy competitive by subsidizing the cost to producers and consumers, with the hope that (1) economies of scale will drive costs below that of fossil fuels and allow subsidies to lapse and (2) by providing existing clean energy technologies a niche footprint in the market, deployment policies are providing an opening for emerging technologies close to the commercialization phase.

Creating a More Innovation-centric Deployment Policy

Deployment incentives are an integral part of the innovation ecosystem because they help reduce costs, eliminate information and infrastructure barriers to achieving market introduction, and create new markets for next-generation technologies. Unfortunately the nation’s current system of subsidization and financing of clean energy is chiefly focused on deploying mature technologies, instead of providing a direct pipeline for emerging technologies to reach market. Implementing deployment tools that only support the most mature technology options can potentially help pull emerging technologies into the market. In fact, wind turbine companies constructing wind fields because of the Production Tax Credit are also now able to work with researchers, such as those the National Renewable Energy Laboratory, on next-generation turbine designs.  But the connection between research and market for other industries like solar and battery storage is not so clear.

Well-structured deployment policies with innovation in mind – such as those that leverage performance standards to foster companies to innovate, or those that spur regional collaborations that tie research with deployment options – are needed to move these industries to competitiveness as quickly as possible. Even the wind industry could better utilize incentives to ensure that the most innovative wind turbines, and not just the most mature, are installed using public investment.

Public investments in deploying emerging technologies are at an all-time low; an innovation ecosystem absent this investment stifles technological change and directly impacts America’s response to climate change.  Emerging technologies are what ultimately will drive carbon emissions to zero as quickly as possible by providing low-cost, high-performance alternatives to fossil fuels. The imperative to accelerate the development and deployment of these technologies is quickly growing. In other words, not only must we increase public investment in deployment, we must also ensure complementary reforms to the policies themselves to emphasize support for emerging technologies in the context of improving our innovation ecosystem. This is a taller task for sure, but one that is desperately needed if we are to meet our climate goals.

Originally posted at the Consumer Energy Report.