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?

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April 30, 2009 4:51 PM
 

Solar power for homes said:

Governments are not just involved in innovation, they are instrumental, You just have to look at repressive governments to get a proper idea of this.

May 6, 2009 3:28 PM
 

Mr. Renewable Energy said:

When it comes to the development of renewable energy technologies, the government definitely plays a role in innovation.  Money is needed for innovation, and usually the government are the ones who supplies that money.

Good article though :D

May 29, 2009 2:05 AM
 

PORTFOLIO said:

I like the sarcasm in the first few sentences.

Other than that Government is not always responsive to change. Rigid and buearucrayic structures are slow! My opinion:) lol

June 20, 2009 3:36 PM
 

Earth4Energy said:

Alternative energy is extremely important in today's global scenario. Many countries around the world have signed the Kyoto Treaty, which actively seeks to reduce pollutants and greenhouse gases on a global scale.

And this is where alternative energy sources play a vital role - in preserving the earth's ecological balance by generating energy that doesn't use fossil fuels, thereby conserving these non-renewable resources. This in turn significantly reduces the toxic byproducts released by fossil fuels during the energy generation process.

Putting it simply, alternative energy is energy derived from sources other than the conventional fossil fuel sources of oil, natural gas and coal. When we say fossil fuels are nonrenewable it means that they're limited and will gradually run out, making the process of accessing them expensive and hazardous to the environment.

If we want to repair and undo some of the environmental damage we have wrecked on our planet, our future needs to look green. And it has to start now, with our governments and ourselves... A good starting point is to switch to homemade solar and wind power systems.

July 30, 2009 5:58 AM
 

clarke said:

Nice to see a article analyzing the current solar technologies and how to use our renewable energy! Where many people now days wastes the existing energy without using it in a useful manner.  Mean while I have owned two solar panels by using the ‘Earth4Energy’;  www.earth4energy.com/index05.php  which I am using it for my fridge and lights and fan in my house and I have built it own by using simple strides manual to build the solar panel, where I spent it just $100 to construct it. Now I manage to reduce my electricity bill up to 25%. And I am saving conventional electric energy. Mean while Nice to see a many solar manufacture companies arising day by day in order to make efforts in order to save our health from environmental pollution occurs in wasting many sorts of energies. And everyone must be keenly capitalized on how to use our electric energy in order to reduce bills and utilize the natural resource of solar power.

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Solar Power Technology said:

I think the reality is that people in general don't like change. If renewable energy is going to be successful, someone is going to start having to either front the money to convince people to go that route. However, the tax credits and rebates aren't getting it. That is why I really like the idea that one company in CO had where they install a solar power system for free, however they get to pocket the money you save. What a great idea.

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About Mike Mata

Mike Mata serves on a number of advisory boards for growing businesses and non-profits. He brings 25 years of experience in the computer industry in executive roles for companies such as Hewlett-Packard Company, Compaq Computer Corp., BMC Software and IBM. Before retiring in 2003, Mike served as vice president of Global Accounts at Hewlett Packard. Prior to joining HP, Mike served as Compaq's vice president and general manager of Worldwide Market Development and Partnerships. After joining Compaq, he served in a number of managerial capacities, including vice president of the Enterprise Solutions Division. Mike also held management roles in business development, commercial marketing, business planning, distribution strategy and major account marketing. At Gateway, Mike served as the vice president of e-Commerce & Business Development and as vice president of Marketing.