September 2008 - Posts

Welcome to the Innovation@Merage Blog
The Paul Merage School of Business is pleased to provide this blog for discussing information on all aspects of innovation and how it is impacting businesses and academics. We hope you will find our blog to be an engaging way to communicate about the latest topics on thought leadership.  

  • Does Government Play a Role in Innovation?

    Much of the time our gut reaction is that the best action that government can take to foster innovation is to stay out of the way.  But, are there examples for governmental involvement? 

    One case where the federal government’s involvement helped spur rapid innovation is the origins of the internet.  In this blog post I won’t try to retrace the complex history of the internet (see Wikipedia or Internet Society) but, suffice it to say that DARPA’s (Defense Advanced Research Projects Agency) leadership in packet switching (one of the key components of networking), hypertext, and a national level network (ARPANET) among many other related contribution were fundamental keys to the origin of the internet.  Also, the first graphical browser (Mosaic) was developed by a team at the National Center for Supercomputing Applications at the University of Illinois at Urbana-Champaign.  The financial support for this effort came from the High-Performance Computing and Communications Initiative, a funding program initiated by then-Senator Al Gore's High Performance Computing and Communication Act. 

    solar power innovationNow there is a growing national consensus about the benefits of gaining energy independence through renewable sources as a long-term solution to high gasoline prices, fossil fuel availability and global warming.  In the U.S., one of the catalysts for making the current generation of windmills, solar panels and biofuels cost competitive is federal and state investment and production tax credits.  Without these credits current renewable energy manufacturing and large scale installations have the potential to be reduced dramatically.  For example, Congress let the federal tax credit expire in 2000, 2002 and 2004. Subsequently, wind capacity installation dropped 93 percent, 73 percent and 77 percent, respectively, from the previous year.

    But, today even as the presidential candidates talk about their plans for strategic investments in a clean energy future, the current federal tax credits are scheduled to expire at the end of this year.  Without Congress renewing these credits, renewable power firms are planning to cut, not grow, their investments and deployments (Yahoo News).  This uncertainty regarding tax policies creates uncertainty for firms and investors in energy projects that take many years to gain a return.

    Even if the current federal tax credits are extended, it is interesting to see how the particulars of the tax code impacts energy innovation.  Rather than try to outline all the complexities and implications of the current U.S. tax code and energy regulations; I will outline a few highlights of the current situation with solar energy and how they impact investments in accelerating deployments and innovation.  

    Publically owned utilities are generally ineligible for federal solar tax credits (versus independent power producers and residential customers).  And, excess solar energy that is created on the customer side of the meter (e.g., residential or commercial solar power) is often credited back at retail not wholesale prices (net metering) which reduce overall utility revenues.   Even if utilities purchase energy from large scale independent solar farms, they are not able to earn a return as regulations allow them to only earn a return on assets - not costs.  This results in large scale solar farm produced energy as not being economically viable for investor owned utilities. 

    Some individual states are trying to counter the financial disincentive for utilities to invest in solar by accelerating the use of Renewable Portfolio Standards.  RPS’s require utilities to increase the percentage of their electric sales from renewable resources (often with carve outs for specific technologies such as solar) by specific dates.  But, RPS compliance by utilities does not enhance their business prospects so there is no need for them to go beyond what is mandated by the states.  And, identifying new business models is not generally a highly regulated industry’s focus or experience.  But, there is some light at the end of the tunnel as a few utilities are investigating ways that they can “own” solar assets which will likely require regulator justification to pass costs to general ratepayers or provide programs for rate payers willing to pay a premium.  For innovative and patient entrepreneurs that are working in this strategic industry, there is hope that the current presidential candidates are talking about creating comprehensive renewable energy plans.  So, are solar and other renewable energy technologies one of those exceptions where early governmental investment or regulation is beneficial to the business of innovation?