This essay discusses how the growth of knowledge based industries help energy providers to meet the daunting challenges they face in grappling with energy demand, security, rising prices and, of course, climate change.
Bill Gates said of the computer revolution, “Never before in history has innovation offered promise of so much, to so many, in so short a time.” We might then ask: to what extent does the rapid rise of “knowledge-based” industries offer energy providers lessons on innovation pathways as they struggle to meet the pressing energy challenges of increased energy demand, energy security, rising prices and climate change? This last challenge adds urgency to the innovation agenda because the 50-year time scale for exhausting a prudent global CO2 emissions “budget” is roughly the same as that for major transformation of our fossil fuel based energy infrastructures.
Risking oversimplifi cation, we can frame this discussion around two classes of energy innovators, energy incumbents and market transformers. The energy incumbents comprise highly capitalized, multi-billion dollar, commodity-based enterprises with well integrated supply chains. Energy incumbents provide consumers with essential services at large scale, inviting extensive government regulation and inspiring complex domestic and international politics. These characteristics inherently infuse the incumbents with considerable inertia, where lower costs, access to increasingly scarce and expensive resources and regulation are key motivators of innovation. This contrasts with knowledge-based industries, which track the more classic pattern of disruptive innovation, where new functionalities and services establish a pathway to market share, frequently without the same price sensitivity seen in commodity markets.
A rapidly growing number of “green tech” newcomers have entered the energy marketplace. Often as start-ups, these relatively new players are developing technologies that could fundamentally transform how we produce, distribute, consume – and conserve – energy.
Like their knowledge-based industry counterparts, these transformers seek to capture market share with novel technologies. However, in contrast to knowledge-based companies that moved into largely unoccupied market terrain, the energy transformers seek to provide consumer services with almost identical services as the incumbents: heat, power and fuel. Innovation by transformers is often policy sensitive as opposed to functionality driven, as they seek to address the costs of key objectives not yet internalized in energy prices, especially energy security and CO2 emissions reduction. This frequently translates into reliance on transitional government fi nancial subsidies or legislated requirements (such is renewable portfolio standards) to establish markets. Also, it tends to move disruption to the provider as opposed to the consumer end of the innovation spectrum.
An important part of the energy innovation challenge will be to facilitate an effective partnership between the incumbents and transformers. Transformers are essential for bringing forward new clean technologies that will be economically competitive if and when, for example, CO2 emissions are priced appropriately; deployment at scale and in a timely way, however, will quite likely depend upon the distribution systems and customer base of the incumbents.
The scale challenge cannot be overestimated as a determinant of how the fruits of technology innovation will materialize. In March 2007, Jeff Immelt, CEO of GE, spoke to an entrepreneurial audience at the Massachusetts Institute of Technology (MIT) and suggested that he looked to them to create US$ 50 million companies, so that GE could grow them into US$ 5 billion companies! This highlights the scale issues faced by energy transformers as well as the importance of incumbenttransformer intersections. It also describes a pathway for the remarkable advances of the last decades – information technology, biotechnology, nanotechnology – to enable not only new technologies but also their deployment at a scale commensurate with the energy/environment challenges at hand.
University research will play an important part along the innovation pathways of both the incumbents and transformers. Work at MIT, our home institution, exemplifi es this. Multidisciplinary faculty groups are focusing on developing intelligent infrastructure for effi cient buildings and energy delivery systems, more effi cient vehicle-fuel systems, coal conversion research minimizing the carbon footprint, advanced nuclear fuel cycles to reduce waste management burdens and the science and regulatory needs of large-scale CO2 sequestration. Transformational technologies are also a key focus at the Institute, including advanced solar energy technologies, next generation biofuels with much higher conversion effi ciencies from sunlight to fuel energy, and nanotechnology-enabled material design tailored to batteries, fuel cells, photovoltaics and thermoelectrics.
Both innovation tracks are essential and, with success, will lead to yet another form of innovation – energy industry organization and service delivery. Batteries and plug-in hybrids could have utilities in the transportation “fuel” business; conversely, gasifi cation and sequestration could lead to the signifi cant engagement of petroleum companies in the power business. Biofuels bring agribusiness into energy. Distributed generation changes the utility-consumer relationship. These changing business landscapes serve as both drivers and possible outcomes of innovation and, indeed, are already evident in the activities of many energy incumbents.
Our challenge is to harness these various forms of innovation into a robust system capable of meeting the energy/ environment challenge. We have ample reason for optimism for a rapid pace of technology innovation. Implementing complementary public policies to support this innovation has a less certain course.
Susan Hockfield, President, Massachusetts Institute of Technology, USA; Member of the Foundation Board, World Economic Forum; Melanie Kenderdine, Associate Director, Strategic Development, Massachusetts Institute of Technology Energy Initiative, USA; and Ernest J. Moniz, Professor and Head, Department of Physics, Massachusetts Institute of Technology, USA
This article is brought to you in partnership with the World Economic Forum