Is the Fit Right? Considering Technological Maturity in Designing Renewable Energy Policy

Recent studies suggest that the United States can greatly expand its deployment of renewable energy resources beyond current levels. This would reduce emissions of harmful pollutants and enhance energy security by diversifying the nation’s domestic energy supply. This brief describes a number of policy tools that can be employed to drive investment in renewable energy technologies and discusses which policy options may be the best fit based on the commercial maturity of a targeted technology. We examine several policy tools to describe where they have been most effective to advance technology progress along the innovation chain. The findings and recommendations presented are based on a study of the literature on technology innovation and policy best practices, as well as on discussions with experts in the field, policymakers, and private sector companies involved in renewable energy projects.

Key findings:

• Grants can be used to fund technologies in their earliest stages—research and development (R&D) and early-stage demonstration. The R&D stage involves significant uncertainty as to whether the concept will ever lead to a viable technology application. Grants help overcome this risk because they provide an important cost share for investment to research and develop the technology further. Technologies in the demonstration stage typically have difficulty accessing commercial investment due to uncertainty on technical performance and the inability to provide performance warranties. It is unclear whether they will eventually be financially profitable, particularly in the near-term. Demonstration grants allow commercial investors time to pilot and evaluate a new technology with appropriate due diligence. This can reduce risk perception and facilitate further investment.

• Loan guarantee programs are well suited for technologies in the commercialization and early deployment stages. In these stages, project performance remains uncertain, making it difficult to attract investors. Loan guarantees help attract private investors by sharing the risk of technical failure with a financially secure and credible entity (namely, a government agency).

• Tax credits and feed-in tariffs (FITs) can help advance technologies in the later stages of innovation, namely commercialization and early deployment. These policies allow projects to earn more profit for electricity produced so that they earn the revenues needed to offset higher upfront investment costs.

• Renewable electricity standards (RES) are most effective for more mature technologies that are in early deployment. An RES creates demand for renewable electricity and allows the market to determine how to most efficiently supply it; thus the market sets the premium paid to renewable resources. RES mandates can allow for open competition among a range of different technologies, or can be tailored with a carve-out to promote specific technologies that are not yet cost competitive with other renewables. The carve-out option can be a good fit for technologies that are still in the commercialization phase.

• A favorable regulatory environment is important to ensure that renewable energy technologies do not face inherent disadvantages due to interconnection standards, utility pricing structures, and other legal hurdles. Failing to address regulatory barriers to renewables can increase their cost of deployment and reduce the effectiveness of incentive programs.