Further Energizing Innovation in Fiscal Year 2023

The FY 2023 budget request signals America’s commitment to sustaining bipartisan momentum for clean energy innovation. Congress should seize this opportunity to accelerate domestic clean energy industries and shape the U.S. response to climate change.
Further Energizing Innovation in Fiscal Year 2023

Executive Summary

Introduction

Innovation Is Essential to Address Climate Change and Boost U.S. Competitiveness

The Key Role of the Federal Government in the U.S. Energy Innovation System

The Department of Energy—And Lots of Other Stuff

DOE RD&D: Generating Environmental and Economic Benefits

2022: Maintaining the Momentum for Energy Innovation

2023: Taking the Next Step

Other Legislative Opportunities

What Happens Next

Conclusion

Endnotes

Executive Summary

The Biden administration’s FY 2023 budget request for the Department of Energy (DOE) calls for a 25 percent increase in investment in clean energy RD&D over FY 2021 enacted levels. Along with the passage of the Energy Act of 2020 and the Infrastructure Investment and Jobs Act (IIJA), this proposal is an encouraging sign for the progress of climate-tech innovation and would sustain the momentum of federal clean energy research, development, and demonstration (RD&D) programs. Continuing along this trajectory is vital to develop the climate solutions the world needs while strengthening the competitiveness of U.S. technology developers and manufacturers.

The context for federal clean energy innovation investments is daunting. Unabated fossil fuels still dominate global consumption. New technologies that would drastically reduce greenhouse gas (GHG) emissions from many major sources cost too much, perform too poorly, or are simply unavailable. Although the global energy innovation system still has major gaps, many countries have advanced assertive programs targeting specific sectors that collectively threaten U.S. leadership, including in public funding for energy RD&D, where the United States has long been the top investor.

Such funding has proven its value in the past. Yet, had it kept pace with the growth of the U.S. economy since DOE’s founding in 1978, the department’s RD&D budget today would be about $30 billion, more than three times its level in fiscal year 2022. The bipartisan consensus that led to recent legislation and funding increases must be sustained in order to approach that level again, as numerous expert studies have advocated. The administration’s budget would raise it to over $10 billion in fiscal year 2023. Congress should seize the opportunity to sustain the momentum, accelerate domestic clean energy industries, and shape the U.S. response to climate change.

This report describes DOE’s RD&D programs, assesses significant updates to them, and discusses notable gaps that still remain. It is supported by an interactive that will be updated throughout the FY 2023 budget cycle at itif.org/rdd-fy23.

Introduction

The fiscal year (FY) 2023 budget is an important opportunity for Congress and the administration to keep up the momentum of U.S. investment in energy innovation. The Energy Act of 2020 and the recently passed IIJA, both of which won bipartisan support, have paved the way for a major expansion in federal RD&D funding to combat climate change and strengthen U.S. competitiveness. Many members of Congress have joined President Biden in calling for a reinvigoration of the national energy innovation system to reverse decades of declining investment and position the United States to thrive in the global clean energy transition.

Many U.S. competitors have been investing heavily in RD&D to develop low-carbon technologies and capture growing global clean energy markets. Most notably, China nearly doubled its investment between 2015 and 2019. It now invests more than the United States does in key technologies, including solar energy, lithium-ion batteries, advanced nuclear, carbon capture, and electric vehicles (EVs).[1] Meanwhile, Europe is outperforming the United States in offshore wind and has set aggressive targets in hydrogen and low-carbon steel.

The U.S. government has begun to respond to the global and international challenges of the low-carbon economy of the future by boosting its investment in energy RD&D by 39 percent between fiscal years 2017 and 2022. Yet, as a share of the U.S. economy, federal investment has grown little, hovering around 0.04 percent of gross domestic product (GDP), far behind leading European countries such as Norway and Finland.[2] With the legislative foundation provided by the Energy Act and IIJA in place, Congress and the administration have an opportunity to forge a path in fiscal year 2023 that will break through this barrier.

This report builds on Energizing America, the Information Technology and Innovation Foundation’s (ITIF’s) 2020 book-length collaboration with Columbia University’s Center on Global Energy Policy, as well as more recent ITIF annual reports on the energy RD&D budget and related analyses. It provides an overview of federal energy innovation programs, including the key role of DOE in advancing energy technologies, and highlights the department’s impact on national energy systems. It assesses the significant updates to DOE’s program authorizations made in the Energy Act and the prospects for greater investment in the FY 2023 budget and appropriations cycle.

Twenty-two infographics accompany this report online. Each includes a description of a DOE RD&D program and its technology goals, including renewable energy, transportation, energy efficiency, grid modernization, nuclear energy, fossil energy and carbon management, and basic sciences. The infographics also highlight what’s at stake in each program, along with its potential impacts, historic and authorized funding levels, and targeted recommendations for Congress and DOE to accelerate innovation. They form the core of the that will be updated throughout the FY 2023 budget cycle at itif.org/rdd-fy23.

Innovation Is Essential to Address Climate Change and Boost U.S. Competitiveness

The transition from a global energy system dominated by unabated fossil fuels to one with net-zero emissions is vital to mitigate climate change, protect human health, and help revitalize the U.S. economy. However, clean energy alternatives have not yet been commercialized for certain sectors that produce large amounts of GHG emissions, including aviation, shipping, steel, cement, and chemicals manufacturing. Meanwhile, many of the clean technologies that already have been commercialized—such as EVs—are still more expensive than are the high-emitting technologies they would replace and face other barriers to scaling up. Costs and barriers must continue to fall for these clean technologies to cut emissions drastically.

The energy transition also brings with it risks and opportunities for U.S. industry. Investment in key technologies—from hydrogen to EVs to batteries to carbon capture and storage (CCS)—is rapidly increasing around the world. Global investment in clean energy marched to its highest level last year despite the ongoing pandemic, even as many traditional-energy industries suffered from delayed or declining investment.[3] The Russian invasion of Ukraine has added even more uncertainty to the global picture.

The passage of the IIJA signaled the United States’ ambition to reclaim its position as a leader in clean energy innovation. Furthermore, in response to the ongoing supply chain challenges, the United States has recently initiated a strategy on manufacturing competitiveness, and President Biden has invoked the Defense Production Act to boost production of critical minerals used in EV batteries. A key question for policymakers is whether the United States can weather today’s supply chain challenges and continue to champion investments in tomorrow’s clean technologies.

Fundamentally, the solution to both the supply chain and energy transition challenges is to boost U.S. investment in innovation. But accelerating innovation requires assertive federal policy that involves more than basic research funding. Innovation requires both proactive public investment in development and demonstration, along with the creation of markets to hasten early adoption and ignite private sector innovation and competition.[4]

The Global Context for Federal Energy RD&D Investment

Global investment in energy was $1.9 trillion in 2021, rebounding nearly 10 percent from 2020 levels—putting it almost back to pre-pandemic levels.[5] But the share going to clean energy fell 1 percent from 2020. Investment in renewable power grew 2 percent in 2021 to $367 billion (in 2019 dollars). Global investment in EVs and charging infrastructure surged by 77 percent to $273 billion in 2021 and is on course to overtake investment in renewables in 2022.[6]

Figure 1. Government energy RD&D investment as a percentage of GDP, 2020[7]

As countries around the world seek to stimulate their economies and recover from COVID-19 amid the ongoing supply chain issues, many countries are also stepping up in clean energy technology investments. The European Union announced more than $200 billion in climate-friendly economic recovery investments, such as clean hydrogen infrastructure.[8] The Chinese government has announced a “new infrastructure” package worth $1.4 trillion that will include investments in advanced energy industries and infrastructure. Japan, the European Union, and 11 other nations have launched national hydrogen strategies and are investing heavily in electrolyzers, fuel cells, and other hydrogen technologies.[9]

Even in public funding for energy RD&D, an area wherein the United States has long been the top investor, U.S. leadership is now being challenged by China and Europe. China nearly doubled its investment in low-carbon energy RD&D between 2015 and 2019 annually, quickly catching up to the United States.[10] Eleven other countries invest more in energy RD&D as a share of their economies than does the United States (figure 1).[11] As other countries have stepped up their investments in clean energy, the United States’ share of cleantech patents filed in at least two jurisdictions fell from 25 percent in 2013 to 20 percent in 2018, indicating that U.S. leadership in innovation truly is waning.[12]

These trends, combined with the decline of the U.S. manufacturing sector, has seriously jeopardized the United States’ position as a leader in many clean energy technologies. The National Academies’ report Accelerating Decarbonization of the U.S. Energy System argues that “the United States should attempt to claw these industrial sectors and markets back, so that it leads the world both in innovation and in the manufacturing and marketing of advanced clean energy technologies.”[13]

The Biden administration’s supply chain task force responded with initiatives on building resilient supply chains, revitalizing American manufacturing, and fostering broad-based growth.[14] In February 2022, DOE followed up with its first-ever comprehensive strategy, which contains 13 assessment reports on securing the supply chain for a robust clean energy transition.[15] The United States must combine its bountiful natural assets with its culture of innovation to regain global leadership and competitiveness in clean energy technology, modernize and transform the U.S. manufacturing base, and create a new generation of clean energy jobs.[16]

Innovation to Combat Climate Change

According to the International Energy Agency (IEA), only 2 out of 46 critical energy technologies (EVs and lighting) are currently “on track” with IEA’s Net Zero Emissions by 2050 Scenario (figure 2.)[17] The Intergovernmental Panel on Climate Change’s recent Sixth Assessment report sounds the alarm: Without immediate and deep emissions reductions across all sectors, it will be impossible to avert climate change, and these reductions depend on innovation.[18] The message is both clear and dire: Assertive RD&D and market creation efforts are needed in the 2020s to develop, improve, and scale up nascent, low-carbon energy technologies so they are available as near-term decarbonization opportunities reach their limits.

The global energy innovation agenda since 2009 has focused, with considerable success, on reducing the cost and expanding the use of wind and solar resources for electricity generation. Rapid cost declines in solar PV, wind turbines, and grid-scale batteries are enabling decarbonization of the power sector in a much faster timeframe than was imagined a decade ago.[19] As a result, the electric power sector has made more progress in GHG emission reductions have than other major sectors.

Figure 2: International Energy Agency ratings of global progress on key technologies[20]

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Still, as ITIF’s Stefan Koester has shown, continued innovation in renewable energy is not a given; public policy must continue to support technological improvements.[21] Of the $41.7 billion appropriated for clean energy RD&D from the IIJA (see box 1), just 0.4 percent is for solar and wind—compared with battery technologies (15 percent), carbon capture, utilization, and storage (CCUS) and direct air capture (16 percent), and smart grid and energy security (7 percent). The administration’s FY 2023 budget proposal takes heed and proposes expanding RD&D investment in solar and wind (see box 2).

Box 1: IIJA Makes Major Investments to Accelerate Clean Energy and Climate Innovation

The IIJA has appropriated $62 billion to DOE from FY 2022 to FY 2026, of which $41.7 billion could be devoted to RD&D.[22] This sum vastly exceeds prior investments in key fields and will accelerate clean energy and climate innovation. Notably, the IIJA will provide:

— $21.5 billion for clean energy demonstrations;

— over $7 billion in the battery supply chain;

— $6.5 billion in CCUS and carbon dioxide removal (CDR);

— $3.3 billion in smart grid investment, energy security, and cybersecurity programs; and

— $420 million in renewable energy.

While the IIJA boosts what will become increasingly important tools in decarbonizing the United States and the world, much will still remain to be done when the law sunsets after FY 2026. Regular federal appropriations must avert a fiscal cliff for federal energy innovation in the years that follow.

An even more important challenge is to replicate the success of wind and solar power with other clean technologies and across all sources of emissions. In the power sector, new, affordable, carbon-free firm generation that is available 24/7 and can be dispatched on-demand will be needed to achieve a carbon-free electricity system.[23] In the transportation sector, EVs are projected to reach cost parity with gas-powered cars this decade, although significant hurdles related to charging times, driving range, availability of charging infrastructure, and impacts to the grid must be addressed.[24] In buildings, high-efficiency heat pumps and low-global-warming-potential refrigerants can reduce emissions from heating and cooling, but their costs must come down to enable wider deployment.

Innovation challenges are even more acute for harder-to-abate sectors.[25] Aviation, marine shipping, and long-distance trucking are more challenging to electrify than are light-duty cars and trucks, which will likely require carbon-neutral fuels that are as energy dense as the petroleum-based fuels they would replace. Heavy industries such as steel, cement, and chemicals are especially challenging to decarbonize due to process emissions from chemical transformations and emissions from fossil fuel combustion that creates high-temperature heat. Many promising solutions are being developed, but they must be validated and demonstrated at commercial scale before they will make a dent in emissions.[26]

IEA’s Net-Zero by 2050 report finds that nearly half of the emissions reductions needed to achieve that ambitious goal will come from technologies that are today in the demonstration, large-prototype, or small-prototype stage of development.[27] Yet, in the past, new energy technologies—even recent successful consumer products such as LEDs and lithium-ion batteries—have taken 20 to 70 years to go from the first prototype to 1 percent market share.[28] The world cannot wait that long for key clean energy and climate technologies to mature.

Box 2: Raising the Bar in Solar and Wind RD&D Investments

The evolution of solar and wind technologies exemplifies the role of public policy in accelerating innovation and the synergistic interactions between public and private investment. Thanks in large part to these policies working together in the United States and globally, the cost of solar photovoltaic (PV) panels has declined by 99 percent over the last four decades, although most manufacturing now occurs elsewhere—especially in China, where mercantilist policies have helped that nation’s firms gain global market share even as they lowered costs.[29] The levelized cost of land-based wind energy has also fallen substantially over the last four decades, but capital expenditures for such projects stopped falling years ago.[30] Despite these achievements, there is still ample room for further innovation to improve performance and lower costs. Advanced solar and wind technologies such as perovskite PV and floating offshore wind have the potential to overcome the land-use conflicts and geographical limits that confront more established solar and wind technologies.[31]

The FY 2023 budget request seeks to double and triple RD&D investments in Solar Technologies Office (SETO) to $645 million and Wind Technologies Office (WETO) to $365 million, respectively, from FY 2022 levels. In the United States, solar and wind accounted for almost 60 percent of electricity generation capacity additions from 2011 to 2020 but only 13 percent of net generation in 2021.[32] Expanded funding would aim to drive improvements that would enable deeper solar and wind penetration in electricity grids. Moreover, the heightened funding levels would facilitate the siting and integration of renewable power generation and support the development of diversified, resilient supply chains for all renewable energy technologies. Finally, as part of the supply chain competitiveness strategy, the request would provide funding for a new Solar Manufacturing Accelerator, an initiative that partners the Advanced Manufacturing Office (AMO) with SETO.

The Key Role of the Federal Government in the U.S. Energy Innovation System

Many technologies that now make major contributions to the U.S. and global energy systems were created as a result of federal investments and public-private cooperation.[33] Federally funded nuclear power RD&D, for instance, led to large-scale private investment in the commercial power plants that now account for 19 percent of U.S. electricity generation and half of zero-carbon power generation.[34] Decades of investment and policy-driven market development have led to precipitous declines in the cost of new solar PV (90 percent cheaper since 2009) and new wind facilities (72 percent cheaper since 2009).[35]

But unlike software and biotechnology, clean energy faces substantial scale-up and commercialization challenges.[36] Technology development lifecycles in this sector are long, and projects are often capital intensive and bear a significant amount of technical and financial risk.[37] Even venture capital funding, which tends to be less risk averse than other sources of private capital, seeks quick payback times and generous returns on investments that make it a poor match for the cleantech industry.[38] (Although venture capital investments in cleantech have made a roaring comeback in recent years, the lion’s share of these investments has gone to the transportation sector.[39])

For these reasons, the energy industry invests a very small share of its revenues, just 0.5 percent, in research and development (R&D).[40] In addition, because energy is valued as a commodity (i.e., there is no tangible difference in the electricity that comes from a coal plant versus a wind farm) and environmental externalities such as climate change are not valued in the market, emerging energy technologies frequently cannot distinguish themselves from incumbent technologies on performance and must therefore compete on price from the moment they enter the market.[41] Electric utilities are often legally mandated to keep prices low while some (e.g., those in California) are required to maintain a minimum return on equity, which may make it difficult or even impossible to invest in new technologies.[42]

In clean energy, therefore, the burden of financing high-risk, long-term investments falls more heavily on the public sector than it does in typical high-tech industries. Although they are occasionally overcome by bursts of irrational enthusiasm, the market failures in these industries are more profound than most others are.

One often-overlooked market failure is in technology demonstrations. The payoffs from such projects tend to be too small and slow for even deep-pocketed, patient private investors to want to risk. Yet, the U.S. government has paid little attention to this gap, even as it has frequently accepted the risk associated with conventional R&D. In ITIF’s Global Energy Innovation Index, the United States ranks right in the middle (14th) of the 27 countries ranked according to their performance in energy demonstration policy. [43]

This has been a significant missed opportunity for global leadership, but the rankings will surely change as measurement catches up with the policy changes wrought by the IIJA, which established a new DOE Office of Clean Energy Demonstration (OCED) that should help promising technologies such as carbon capture and long-duration energy storage cross the fabled demonstration “valley of death.”[44] (See box 3.) Although the FY 2023 budget proposes a rather small appropriation for OCED, it will receive $21.5 billion over five years thanks to the IIJA (figure 3.)

Figure 3: IIJA appropriation for OCED breakdown by program

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Box 3: Scaling Innovation With the Office of Clean Energy Demonstration

Technology demonstration projects—especially large-scale demonstration projects—that are too risky for the private sector to carry out on its own pose one of the most difficult challenges in energy-innovation policy. The newly established OCED will fill the most glaring gap in the United States’ clean energy innovation system. ITIF’s assessment of a portfolio of 53 energy technology demonstration projects managed by DOE’s applied energy offices between 2009 and 2011 finds that the agency did not perform well on key criteria such as cost sharing, information sharing, and assessment of the follow-on environment.[45]

The new, standalone OCED, if staffed with managers with commercial project management and financial expertise, has a great opportunity to overcome these weaknesses.[46] In addition, it would affirm the importance of demonstration as a vital and distinct step in the energy innovation process that is worthy of federal support.[47]

Yet, the IIJA’s initial funding just begins to fill the need for investment in clean energy demonstrations. The act’s appropriation for energy storage, advanced reactors, and carbon capture technologies—technologies both IEA and the most recent Intergovernmental Panel on Climate Change (IPCC) assessment report have identified as extremely important in fulfilling the Paris Agreement—will sunset after FY 2025; funding for other technology areas will end after FY 2026. A more sustained effort will be necessary to achieve national and global climate goals. As OCED builds its foundation and proves its value, its regular appropriations must grow to avert going off this “fiscal cliff” and stranding the nation’s nascent large-scale energy demonstration program.[48]

The Department of Energy—And Lots of Other Stuff

DOE oversees much more than the nation’s energy system. Indeed, when the other activities of DOE—defense, environmental cleanup, and non-energy-focused basic science—are taken into account, only a small portion of its budget remains to support clean energy innovation. Figure 4 shows DOE’s budget by organization. The department’s $8.4 billion energy RD&D portfolio includes just a minority of the department’s Office of Science (SC), along with most of the funding assigned to its varied applied energy offices.

Figure 4: FY 22 enacted DOE budget by major function ($44.9 billion)

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DOE was assembled in 1977 from previously scattered federal agencies, the largest of which was the Atomic Energy Commission, which had managed the military’s nuclear weapons program since just after World War II. DOE’s National Nuclear Security Administration (NNSA) carries out such defense responsibilities today. NNSA and other defense programs housed within DOE comprise almost half of the agency’s nearly $45 billion budget. The next biggest function, DOE’s Office of Environmental Management (EM) is tasked with cleaning up the massive pollution left behind by the weapons program. It absorbs 18 percent of the budget. Together, these two slices make up two-thirds of the department’s budget and contain no energy RD&D programs.

DOE’s $7.5 billion SC is one of the government’s largest funders of basic science research, providing critical research infrastructure through its support for 10 of DOE’s 17 national laboratories. SC’s research investment is spread across six program areas—Advanced Scientific Computing Research, Basic Energy Sciences (BES), Biological and Environmental Research (BER), Fusion Energy Sciences (FES), High Energy Physics, and Nuclear Physics—plus two new program areas: Isotope R&D and Production and Accelerator R&D and Production. While SC is an important component of the nation’s discovery science ecosystem, less than half of its budget is specifically devoted to advancing energy research. (ITIF includes only BES, FES, and the portion of BER that supports bioenergy research centers in its definition of energy-related research.)

DOE’s energy programs include both RD&D and non-RD&D functions. Most of the energy RD&D budget is distributed across the applied energy offices: Energy Efficiency and Renewable Energy (EERE), which houses programs in renewable energy, sustainable transportation, and energy efficiency; Electricity, which supports grid modernization; Cybersecurity, Energy Security, and Emergency Response (CESER); Fossil Energy and Carbon Management (FECM); and Nuclear Energy (NE). In addition, the Advanced Research Projects Agency for Energy (ARPA-E) is a stand-alone, semiautonomous agency that advances cross-cutting research in high-potential, high-impact energy technologies that are too early for private sector investment. The new OCED is housed in a new Office of Infrastructure and, as noted, supports clean energy technology demonstration projects.

DOE’s energy programs also support non-RD&D functions. The Energy Information Administration, for instance, provides data and analysis to identify energy demand and supply and model the U.S. energy system to project future trends. The Weatherization Assistance Program supports deployment of energy-conserving technologies for low- and moderate-income households. The Office of Indian Energy finances energy infrastructure projects on tribal lands. DOE’s State Energy Program provides technical assistance and support to states, primarily to support state-level energy offices. The Strategic Petroleum Reserve and other fuel reserves maintained by DOE provide critical insurance against potential interruptions in U.S. fuel supplies.

DOE’s entire energy RD&D portfolio totals $8.6 billion for fiscal year 2022, or about 19 percent of DOE’s budget (figure 4.) The portfolio spans 23 science and technology program areas: ARPA-E, OCED, and across 7 technology categories (see figure 5): renewable energy; sustainable transportation; energy efficiency; energy transmission, storage, and distribution (TS&D); nuclear energy; fossil energy & carbon management; and basic energy-related research.

Figure 5: DOE’s RD&D funding by program area, FY 2022