Energy Technology Innovation at the State Level: Review of State Energy RD&D Programs

Miriam Pye and Steven Nadel

July 1997

The study includes case studies on a dozen of the more successful ASERTTI programs, a discussion of relevant restructuring issues, recommendations on the role of state energy RD&D institutions in a more competitive utility environment, and profiles on 15 ASERTTI members. The objectives of the study are to:

• Inform policymakers, energy professionals, and the public regarding the status, funding mechanisms, achievements, and rationale for state energy RD&D organizations;
• Address the state energy RD&D role given a more competitive utility industry; and
• Evaluate different approaches to energy RD&D and technology transfer, which could help organizations design future programs and help states considering starting an energy RD&D organization.

An advisory panel with energy experts from ASERTTI, DOE, a national laboratory, an energy service company, a university, and a state utility regulatory commission provided input on project design, selection of case studies, and the draft report.

State Energy RD&D Institutions and the Association of State Energy Research and Technology Transfer Institutions (ASERTTI)

These institutions develop and promote energy efficiency and renewable energy technologies. ASERTTI members vary significantly in terms of type, funding levels, and funding sources.

ASERTTI members managed more than $170 million in 1995/96 for energy research. This amount includes a $65 million state RD&D institution budget and $109 million in project co-funding for the ASERTTI members who provided funding data. Compared to efforts of utilities, the federal government, Electric Power Research Institute (EPRI), and Gas Research Institute (GRI), who together spent more than a billion dollars on energy-related R&D in 1996, state energy R&D efforts are small. Despite relatively small funding levels, state energy RD&D institutions have sponsored public-benefit programs that have had nation-wide impact, and have been particularly effective in addressing state and local priorities.

Achievements and Lessons Learned from State Energy RD&D Case Studies

This paper includes 12 case studies of some of the more successful and innovative ASERTTI-collaborative and ASERTTI-member projects. The case studies reflect the innovative approaches that state energy RD&D institutions are taking—approaches that integrate technology development and deployment to advance state-of-the-art technical knowledge to address real-world needs and opportunities. These projects are not confined to a single piece of hardware; instead, they define technology more broadly to include energy systems and services.

State energy RD&D institutions have historically built on research by others and filled in gaps when a significant state need was not being met. The state energy RD&D institutions build on the more basic research capabilities of the federal government and university systems and focus on technologies and services with potential for timely commercialization and use. Many ASERTTI members have worked collaboratively with utilities to plan and manage programs. Most ASERTTI members work extensively with energy end-users and technology developers in their respective states. The state energy RD&D institutions have developed many successful approaches to make public-interest RD&D efforts more effective:

• Collaborating with a variety of partners brings a diverse range of expertise to their projects, stretches research dollars, makes the technologies developed more marketable, and creates closer contacts with constituents.
• Getting stakeholder input from the beginning of the process allows for agreement on project design.
• Putting effort into building strong partnerships is part of what places state energy RD&D institutions in a unique position to involve a wide range of partners.
• Approaching projects as objective service providers strengthens their credibility.
• Taking marketing and technology transfer into account in initial project stages shapes research to accommodate commercialization and maximize effectiveness.
• Understanding customers and marketplace dynamics is key to successful marketing of new products or services.
• Focusing efforts is important and can be facilitated by structuring requests for proposals (RFPs) so that they solicit multiple complementary projects that address a topic area that has been identified as "ripe for action."
• Being flexibile allows organizations to act quickly to pick up "hot" projects, and fosters project expansion by being open to identifing opportunities throughout the entire project.
• Being patient is required because it often takes time to get the attention of manufacturers, develop a productive relationship with them, conduct R&D, and get to the commercialization phase.

State energy RD&D institutions have evolved over the years, learning lessons such as these not only from successes, but also from failures. Emphasizing project evaluation would further strengthen credibility, as most projects are not well-evaluated. Evaluation criteria should be identified early in the planning stage. Certain institutions have struggled with cumbersome administrative bureaucracies. Others are still working on maximizing the number of the "public" who can benefit from their public-benefit RD&D (i.e., doing good work and getting the message out—through marketing, publications, workshops, etc.). "Marketing" their prod-uct" could only be enhanced by further evaluation of their programs, so the public can better understand the magnitude of the return on the investment in energy efficiency and their contibution toward public-benefit RD&D.

State Energy RD&D Institutions as Providers of Public-Benefit RD&D

Public-benefit RD&D involves goods and services that benefit society, but for which private interests cannot capture enough revenues to recover the cost (plus a profit) of providing the goods and services (e.g., space exploration). In addition to providing a variety of services to promote the creation, development, and commercialization of new technologies for energy efficiency, public-benefit RD&D can address myriad market failures that persist in the energy services marketplace.

Public-benefit RD&D performed by state energy RD&D institutions is gaining in importance because fewer organizations are providing it as a result of electric utility industry restructuring, decreasing federal budgets, and businesses focusing more on near-term profits. Public-benefit RD&D that reduces energy use and pollution can also enhance business competitiveness by reducing the energy and waste content of their products.

In order for a market to function, good information is needed and state energy RD&D institutions have proven their ability to disseminate information well. By supporting development of renewable energy sources by local businesses, state energy RD&D institutions can diversify the states' energy resource mix.

State energy RD&D institutions can also reduce the economic and environmental costs of predicted growth in transportation energy demand, and help fiscally stressed municipalities meet environmental requirements.

While substantial and useful RD&D can be included in broader public-benefit programs, a valuable role exists for statewide, dedicated RD&D. The benefits of working at a statewide level, compared to federal RD&D, include:

• Focus on state and regional needs and opportunities provides RD&D that is not addressed by national programs (e.g., ECW's work with the paper industry and FSEC's promotion of solar water heaters);
• Closer ties with local industries and consumers make RD&D more "customer driven" (e.g., NYSERDA's work with New York businesses and CEC's work on building codes for electric vehicle chargers); and
• Closer ties with state and local RD&D expertise enriches the value of the RD&D (e.g., CIEE and University of California and LBNL).

Benefits also accrue from working at the statewide level as compared to individual company RD&D:

• Greater resources can be brought to bear and more coordination is possible than if individual companies and utilities operate their own public-benefit RD&D programs. For this reason, many utilities have voluntarily chosen in the past to channel a portion of their R&D funds through statewide organizations (e.g., NC Advanced Energy Corporation and ECW);
• A dedicated statewide R&D fund has greater visibility than more dispersed efforts;and
• State institutions are in a better position to leverage federal resources.

State energy RD&D institutions effectively fill a need for RD&D that can focus on state and local needs and coordinate a range of resources from across the state. The biggest issue currently on the minds of state energy RD&D institutions is the uncertainty of future funding sources as the electric utility industry restructures.

Electric Utility Industry Restructuring and the Future of State Energy RD&D Institutions

Utility restructuring will probably alter the mix of RD&D and may add new functions to state energy RD&D institutions' activities. In all five states that have ASERTTI members and where some restructuring decisions have been made, it appears that the R&D institutions will continue, some with their traditional funding sources and some with funding from a small charge on distribution service. In some cases, the role of ASERTTI members will expand, as has already happened with the California Energy Commission (CEC) and could happen possibly with Energy Center of Wisconsin (ECW) and New York State Energy Research and Development Authority (NYSERDA). A future role is not ensured in the case of California Institute for Energy Efficiency (CIEE), although given CIEE's expertise and experience, it is likely that it will partner with the CEC in planning, funding, and managing a major component of the public-benefit RD&D program. On the other hand, thus far, none of the other states that have made restructuring decisions have existing state R&D institutions, and in most cases are including public-benefit R&D as part of broader energy efficiency and renewable energy efforts. As the roles of state energy RD&D institutions change and expand, ASERTII's coordinating role will grow in importance.

While state RD&D institutions are likely to continue in many states following restructuring, this is only part of the picture. Utility R&D funding exceeds ASERTTI R&D funding by more than a factor of five. Even in states with large state R&D organizations such as New York, California and Florida, utility R&D funding exceeds state R&D organization funding to a substantial degree. As shown in many of the case studies in this report, ASERTTI members often work closely with local utilities to fund projects jointly, thereby leveraging ASERTTI members' funds. While some utility R&D funding will continue following restructuring, unless specific provisions are made by policy-makers, utility investments in end-use R&D are likely to fall precipitously. Such funding cuts will directly reduce benefits from these investments, and can also adversely affect state R&D efforts because there will be less utility funding for state R&D institutions to leverage.

From our review of restructuring in California and other states, a number of R&D issues emerge that all states will need to grapple with as they make decisions on restructuring. Among these questions are the following:

• What is public-benefit RD&D, versus RD&D that can and should be funded by private entrepreneurs or regulated distribution companies?
• Is a dedicated RD&D fund needed, versus funding RD&D out of designated funds for such public purposes as energy efficiency and renewable energy?
• To what purposes should public-benefit RD&D be focused—energy efficiency, renewable energy, environmental research, environmentally preferred advanced generation, system reliability, others?
• Who should administer public-benefit RD&D funds—state agencies, utilities, state boards?
• How much funding should be provided?
• How should funds be allocated?
• To what extent should strategic planning guide decisions about allocation of public-benefit R&D funds?
• Should RD&D programs stop at the point of demonstration, or is there a useful and appropriate technology transfer role for R&D institutions including commercialization and promotion of new technologies in the marketplace?
• How can public-benefit R&D be made more effective?

Suggested answers to these questions are discussed in the Recommendations section of the full report. Briefly, we conclude:

• There is an important role for public-benefit R&D—not all good and socially beneficial ideas will be developed by the private market. Given past cutbacks in private and federal R&D that will be difficult to reverse, it is very important that steps be taken to minimize reductions in state and utility public-benefit spending.
• At least a portion of these funds should be in dedicated, statewide or regional R&D funds to permit a statewide or regional approach to R&D, rather than having to coordinate multiple utility-based efforts. Also, state institutions are probably in a better position to leverage federal resources than individual utilities.
• The R&D organization reponsible for administering programs must be not only a good administrator, but also technically competent and widely perceived as objective. The administrator should have a strategic vision of what it seeks to accomplish and have good ties with private companies and other researchers throughout the state and region. Administrators need the contacts and ability to involve other stakeholders in their planning, prioritization, and funding processes. The administrator also needs to be flexible and independent.
• State public-benfit R&D, including both statewide and utility-supported funds, is currently funded at approximately $2 per capita annually in the states that are leaders in energy innovation. This funding level may be a reasonable level to consider nationwide.
• Priority areas should be established to guide the allocation of funds, so that efforts are focused rather than scattered. For example, priorities can be established and used as the basis for a series of RFPs, one or more for each priority area.
• RD&D institutions should be broad in scope, with the ability to pursue technology transfer and deployment efforts to the extent other players are not adequately addressing these needs. RD&D institutions should plan for and be involved in commercialization activities, with the role of the RD&D institution gradually lessening as deployment proceeds.

State-sponsored RD&D emphasizing energy efficiency and renewable energy sources is a forward-looking investment that can pay off substantially in the long run given national and global challenges such as climate change, urban air pollution, and global economic competition. The states that nurture local production of technologies such as fuel cells, PV systems, hybrid electric vehicles, and super-efficient appliances, etc. today are likely to be the states that will be major suppliers of these key technologies of the 21st century.

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110 pps., 1997, $20.00, E973