Why Hasn’t Innovation Provided a Reliable Alternative to Oil?

11 Apr 2011 Sandeep Mehta

The article Out of Fuel: Why Hasn’t Innovation Provided a Reliable Alternative to Oil? in Knowledge@Wharton has some good pointers about innovation management in general:

Innovation consists of matching a solution to a need,” says Wharton professor of operations and information management Christian Terwiesch. “As it stands right now, the sad reality in the U.S. is there is simply little need for alternative energy from the mass markets. Energy is too cheap. You might look at US$4 a gallon and disagree, but in countries that are moving faster on the alternative energy side, gas is taxed at much higher rates. Cheap traditional energy makes innovation in alternative energy simply less profitable.”

Also, a very interesting graphic showing US government R&D investments over last 50 years.

So, what is the single most important driver of innovation: Funding! Clearly, funding itself is driven by perceived need.  In case of energy R&D, all of the funding disappeared once the 70s oil crisis was over.

According to a study done by the Pacific Northwest National Laboratory for the U.S. Department of Energy, the U.S. government spent nearly US$4 trillion on research and development (R&D) from 1961 to 2008. Of that amount, energy technology development received nearly US$172 billion. But the bulk of that spending was done during the oil crises; since the mid-1990s, the study found, energy R&D has accounted for only 1% of all federal investment.

So what are the lessons an R&D manager should be learning from this? First, carefully study the target market before committing to a large investment beyond technology exploration:

One of the challenges facing energy innovators in creating an alternative to oil is that Mother Nature’s version is hard to beat. “Oil is attractive as an energy source,” Gately says. “It is abundant, easy and cheap to produce, store, transport and convert to many usable forms of energy.”
“No single solution is able to replace oil,” agrees A.T. Kearney’s Besland. “One liter of oil gives more energy than any other resource. Oil is denser. It is also easier to transport and to stock … so nothing will be found which can be comparable to oil. It should be a combination, a mix of alternative energy solutions.”

Second, innovation projects that have a very long timeline to maturation are much harder to fund. Be careful about taking on innovation projects that will take ten years or more to get to market – unless of course there is a clear government funding thrust in the area (as you can see in the figure above).

Another issue alternative energy innovators say they face is the intense pressure to quickly prove their work can become commercially viable. Entrepreneurs in ‘clean tech’ say convincing investors to make long-term commitments to fund their work is an uphill battle, though this problem is not unique to their field.

There have been major innovations in the digital technology but there are a couple of key points that make oil different. 1) There has been a very significant investment in maturing digital technologies from the US Government (part of the defense slice); 2) There is no serious alternative to digital technologies that can provide the user experience – clearly not the case in oil; 3) The technology cycle is much shorter (at least now) and self sustaining in digital than in energy.
Final point to remember is the business model that supports the innovation.  Many energy innovations have gotten bogged down because the business model just does not make it profitable to invest in R&D:

Besland believes solar and natural gas are alternatives with the best potential for future development. “Gas pockets are discovered continuously,” he says. “Amazingly, it is not developed in the Gulf region because gas resources have been sold on long term export contracts. Biomass energy faces a concurrency issue with food. However research on seaweed and used oil are in development. It would take 10 or 15 years for these to reach maturity.”

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