Introduction

Accelerating Innovation With Supply-Push and Demand-Pull Policies

Measuring Innovation With Patents

Measuring Renewables Policies

Findings: Ambitious Renewables Policies Drive Innovation in Complementary Technologies

Policy Implications

Conclusion

Appendix A: Correlation Tables

Appendix B: Method

Appendix C: Full Model Results

Endnotes

Introduction

Investment in Renewable Energy sources, such as solar and wind, provide substantial environmental benefits by reducing greenhouse gases and other pollutants from the energy sector. Due to technological innovation and policy interventions, solar and wind power are the fastest growing sources of generation capacity in the United States. However, these resources have a major weakness: variability. Unlike conventional fossil and nuclear plants, they cannot provide firm, dispatchable power. As a result, they provide a much smaller share of electricity generation than their impressive growth rates may suggest: only about 10 percent in the United States in 2020.^[1]

Complementary technologies are needed to overcome this weakness. For example, energy storage technologies can store solar energy generated during the day to supply power to homes and factories after the sun has set. Combined cycle combustion plants can ramp up and down quickly to offset fluctuations from renewables. Natural gas and coal plants upgraded with carbon capture can provide firm power at all times. Smart grid technologies can enable grid managers to shift among resources to balance variations from wind and solar generators.

More stringent renewable policies are associated with increased innovation in complementary technologies, as measured by patents.

Previous research has shown that policies targeting environmentally beneficial technologies such as renewable energy can drive innovation in the targeted technologies.^[2] However, there has been little research exploring whether such policies have the positive side effect of spurring innovation in complementary technologies. This report aims to fill this gap.

Using data from the Organization for Economic Cooperation and Development (OECD) countries, we find evidence for such an impact. More stringent renewable policies are associated with increased innovation in complementary technologies, as measured by patents. The policies with the greatest impact include public research and development (R&D) spending and renewable energy certificates, such as Renewable Portfolio Standards (RPS) in the United States.

Our findings suggest that policymakers wishing to accelerate innovation in renewable energy, and technologies that complement renewable energy should implement the following recommendations:

• Add or strengthen renewable policies to incentivize innovation in complementary renewable technologies.
• Increase investments in R&D for renewable energy, which have additional benefits to complementary technologies.
• Adopt or strengthen RPS or other market-based demand-pull policies to more broadly stimulate innovation.
• Couple feed-in tariffs (FITs) with other policies, such as R&D, that increase innovation in grid integration technologies.
• Maintain or strengthen environmental taxes for greater innovation in grid-efficiency technologies.

Accelerating Innovation With Supply-Push and Demand-Pull Policies

In order to reduce carbon emissions and thereby sufficiently address climate change, a diverse set of technologies, including both renewable and complementary technologies, must be developed. A recent report by the International Energy Agency (IEA) shows that many technologies that would be needed to reach net-zero emissions by 2070 have not yet reached the market. They are not yet affordable, reliable, or effective enough to be adopted globally. Innovation is also key to fostering a more resilient and diverse economy, and investment in a renewable energy revolution could spur much needed job growth.^[3]

Public policies can correct market failures that hold back innovation. There are two main types of market failure. “Supply-push” policies address the market failure caused by the fact that knowledge is typically a public good. If a firm invests in research, it does not capture all the benefits of this investment. Instead, they spill over to other parts of society and lower the direct returns to the firm. Firms may refrain from making such investments as a result. Public R&D subsidies can incentivize firms to invest in socially optimal levels of research activity.^[4]

The other type of market failure is the environmental externality. Firms often pollute the water, air, or land, thereby imposing costs on community health and the environment without having to pay any price themselves. “Demand-pull” policies, such as environmental regulations, can help to address this issue by forcing firms to limit pollution or imposing a price for it.

A noteworthy study by Johnstone et al. explores how both kinds of policies impact innovation for renewable energy technologies. They found a strong link using an empirical cross-country analysis from 1978 to 2003. Consistent with prior work, they found that supply-push policies such as R&D subsides are consistently a significant determinant of renewables innovation.They also found that demand-pull instruments, including market-based environmental regulations, are effective at stimulating innovation.^[5]

For instance, broad-based demand-pull policies that set state-wide deployment targets, such as RPS, induce innovation in technologies that are relatively cost competitive with fossil fuel technologies. However, for more costly technologies at earlier stages of development, more targeted policies, such as FITs, are needed to incentivize innovation.

These significant findings lead directly to the question that animates this report. Do supply-push and demand-pull policies that aim at renewable energy technologies also induce innovation in complementary technologies, such as energy storage or combustion technology with fast ramp speeds? To answer this question, we turn to patent data.

Measuring Innovation With Patents

Patents have long been used as indicators of innovation. A patent provides a temporary monopoly on an invention. This monopoly overcomes the spillover market failure mentioned previously. Without a monopoly, an inventor might lose out to imitators that have not made the same investment in R&D. The fear of losing out might discourage this investment altogether.^[6]

The use of patents to measure innovation is not perfect. There are differences in the propensity to patent across technology fields and countries.^[7] Simple patent counts require an assumption that all patents carry the same weight and neglect quality, impact, and ease of patentability. However, these issues can be addressed with careful methods.

This study uses data from the European Patent Office’s Worldwide Patent Statistical Database (PATSTAT). PATSTAT is a comprehensive source of bibliographic patent data for over 100 patent offices, including the United States Patent Office.^[8] We used counts of patents granted per country per year from 1992 through 2014 as our dependent variable.^[9]Using patents granted, rather than patents applied for, ensured some level of quality was met for inclusion in our database. We controlled for other factors that affect the time it takes to grant a patent and attrition in our statistical model, which is described in more detail in section 5.

To identify patents in technologies that complement renewable energy, we used the Y02E subclass of the Cooperative Patent Classification codes (CPCs), which includes technologies related to energy generation, transmission, or distribution that reduce greenhouse gas emissions.^[10] We examined three relevant complementary technology categories:

• Combustion technologies with mitigation potential (Y02E 20/00), including waste incineration, combined heat and power, combined-cycle power plants, and carbon capture and storage. The fast-ramping nature of some of these combustion technologies, including advanced combined cycle natural gas systems, can assist with renewables integration.^[11]
• Grid-efficiency technologies (Y02E 40/00), including flexible AC transmission systems, reactive power compensation, superconducting grid components, and smart grid technologies. Some of these technologies enable grid managers to shift quickly among generators to balance variations in wind and solar output.
• Storage and other enabling technologies (Y02E 60/00), including energy storage in batteries and capacitors, thermal energy storage, mechanical energy storage, hydrogen technologies, and high voltage DC/AC inverters. These technologies assist with grid stability by matching energy demand and supply with fluctuating renewable resources for electricity generation. Generally, hydrogen systems can store energy over longer time scales for community-level systems, while batteries and capacitors enable shorter-duration storage at a smaller scale (10 kW to 100 MW).^[12]

We also collected patents related to renewable energy generation (Y02E 10/00) as a robustness check on our models. We found a high correlation between all complementary technology areas and renewables patents (appendix A). The strongest relationship is with storage technologies, indicating these are highly related. Combustion technologies and grid-efficiency technologies are also strongly correlated with renewable technologies, but to a slightly lesser degree. These findings confirm that patent trends in the complementary technology fields identified in this study are similar to renewable energy patenting rates. For this reason, we hypothesize that we will be able to identify spillover effects from renewable policies on complementary technologies. 

Figure 1: Patents granted for complementary technologies across four top patenting countries per year