by David L. Levy
The American Energy Innovation Council (AEIC) released a new report last week, Catalyzing American Ingenuity: The Role of Government in Energy Innovation, which makes the case that the US government should dramatically increase its investment in energy innovation in order to enhance US competitiveness, energy independence, and create affordable clean-energy alternatives. The AEIC doesn’t represent the clean energy industry; rather, it’s a small but highly influential group of CEOs (and a couple of former CEOs) from Lockheed Martin, Xerox, Kleiner Perkins, Microsoft, Dupont, GE, and Cummins. The AEIC report makes the historical observation that “From gas turbines to smart phones, medical imaging technologies to space flight, GPS to the internet, government funded innovation research has improved lives, created jobs, and supported more than a century of U.S. preeminence.”
The report documents the various market failures that impede private sector investments, such as the risky, long term nature of R&D, a lack of competition, and the difficulty in monetizing all the benefits of clean energy. The report highlights the inadequacy of US investment in relation to global competitors, such as China and Germany, and recommends support for “innovation hubs” that encourage “concentrated talent, the exchange of ideas, and the creation of new technologies and ventures” in regional business clusters.
The report was released the same week that California-based solar firm Solyndra filed for bankruptcy after receiving hundreds of millions of dollars in government assistance and loan guarantees, fueling a fierce debate about the wisdom of government investment in clean energy. This is not the place to discuss the details of the Solyndra case (see here, here and here), but it’s clear that much of the criticism stems from a larger, ideologically-motivated campaign against government support for clean energy, with strong links to the political forces against carbon regulation. While it’s true that Solyndra and Massachusetts-based Evergreen have filed for bankruptcy and many manufacturers have seen their profit margins eroded by intense competition, the industry as a whole is booming. The solar industry is the fastest growing sector in the country, with sales rising 67% in 2010, and the cost of panels has fallen by 80% since 2008.
Despite efforts by Fox News and the Competitive Enterprise Institute to disparage renewables and even claim that solar “doesn’t work”, the recent bankruptcies are actually a sign of the industry’s success, bringing the typical transition to maturity, commoditization, and a shakeout of higher-cost producers. Commoditization and cost pressures are severe in the power sector where price is the primary driver, while branding and differentiation are relatively unimportant. Unsurprisingly, manufacturing is therefore shifting rapidly to lower cost locations, notably China. Yet employment in the US solar sector has still grown by 6.8% since August 2010 (net, after taking into account the recent failures) and the US enjoyed a $1.9 billion trade surplus in solar products in 2010.
The AEIC report is only the most recent attempt to raise the alarm regarding US prospects in clean energy. Countries are frequently framed as being in a “race” for a dominant position. The Breakthrough Institute, for example, attracted substantial publicity for a 2009 report titled: Rising Tigers, Sleeping Giant: Asian nations set to dominate the clean energy race by out-investing the United States. The Pew Trust followed in 2010 with a report titled Who’s winning the clean energy race?, and the headline conclusion that the US has fallen to “a distant third in the race for clean energy investment” was picked up by a multitude of news sites.
The notion of a clean energy “race” does have valid conceptual grounding in the idea of regional business clusters. Clusters are geographically concentrated networks of businesses and related institutions such as industry associations, universities, training institutes, and research centers. Clusters usually comprise a range of connected value chain activities, including specialized suppliers and engineering firms, venture capital, professional services, as well as sophisticated customers demanding the latest and best features. As a result, clusters are characterized by a concentration of sector-specific skills and a rich network of connections among people and organizations.
Clusters are attractive as foundations for a dynamic regional economy because they tend to generate high levels of innovation, investment, and incomes. All the firms in the cluster benefit from lower costs, better access to specialized inputs, and the latest information on market trends, production techniques, and technological developments. Importantly, clusters are resilient and enduring, as once they reach a critical mass, their competitive advantages encourage self-sustaining growth. Moreover, business activities are geographically “sticky” and so can resist pressures to outsource to lower cost locations. Clusters therefore enjoy first-mover advantages, as early successes, such as Denmark’s wind industry, become established and enjoy enduring advantages.
A cluster promotion strategy is gaining attention in policy circles. The recent Brookings Institute report on the US clean energy sector found a strong assocation between concentration of business activity in metropolitan areas and rates of growth. The report noted that “Not only are other nations bidding to secure global production and the jobs that come with it but the United States currently risks failing to exploit growing world demand.”. A key recommendation is that the “federal government should increase its investment in new regional innovation and industry cluster programs.”
It’s important to note, however, that the success of the solar industry and its transition to maturity is a result of global investment in R&D and manufacturing, including substantial government support in China and Europe. Rapidly falling solar energy costs create widespread benefits for buyers of solar panels, for energy consumers, and for those employed in the fast-growing industry (not to mention the environmental benefits!). Moreover, national and regional clean energy clusters are not separate racing teams, but are elements of a larger complex global industry with intertwined value chains. Recent academic work has demonstrated how successful business innovators are connected through “global pipelines” to international business networks. In clean energy, many firms operate right from the outset with global customers, suppliers, capital, and technology.
In this dynamic and high-risk environment, the failure of a Solyndra or the shift of some commodity manufacturing to China does not necessarily signal the loss of US competitiveness. As the global clean energy industry grows and matures, firms will reconfigure their global value chains, shifting activities across countries. The US is likely to specialize more in services, finance, and design than manufacturing. It’s still important to invest in creating vibrant clean energy clusters, but the benefits should not be measured in short-term events or narrow national terms. Indeed, it’s critical to understand the competitive basis of high value-added regional clusters in the context of global industries, and to develop collaborative strategies among business, universities, and governments to support their growth.