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Power Surge

A pathway towards next generation energy

Oct 25, 2010, Vol. 16, No. 06 • By STEVEN F. HAYWARD
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Third, driving innovation and price declines requires that the government act directly as a demanding customer to spur the early commercialization and large-scale deployment of cutting edge technologies. Today, firms get subsidies that reward production of more of the same product, instead of innovation that results in lower prices. This framework should be turned on its head. Energy technologies should receive federal deployment funding only to the extent they are becoming cheaper in unsubsidized terms. Either technologies continue to come down in price or they are cut off from future public investment. 

The Department of Defense has a long track record of using the power of procurement successfully to drive the commercialization and improvement of everything from radios and microchips to camera lenses and lasers. In contrast, the Department of Energy has never really played this role. Energy Secretary Steven Chu deserves applause for his efforts to make his department a more effective funder of breakthrough research, but the agency has no way to either procure or use energy technologies at commercial scale. The Department of Defense should help fill this void, once again using procurement to advance a range of potential dual-use energy innovations.

There are good national security reasons for the Pentagon to play an expanded role in securing America’s new energy future. The U.S. military uses more oil than Sweden and more electricity than Denmark, and every $10 increase in the price of oil costs the Department of Defense more than $1 billion, sapping money that should be used to equip our troops for their critical missions at home and abroad. With fuel convoys costing both lives and money every day in Iraq and Afghanistan, questions of energy are understandably high on the list of the Pentagon’s priorities. 

The department should help establish closer linkages between research and procurement. This close connection was key to the successful history of the Defense Advanced Research Projects Agency (DARPA), famous for having invented the Internet, GPS, and countless other spin-off technologies we now take for granted. Congress made a good move in funding an ARPA-E program for energy. But while the Department of Energy is not set up to be a major user of energy technologies, the Pentagon has both the opportunity and the urgent need to use them. The Defense Department can play a greater role in administering ARPA-E and making sure that breakthrough energy discoveries become real-world technologies.

The Pentagon is already looking at the potential of next generation nuclear reactors. For decades, small reactors between one-tenth and one-twentieth the size of existing power plants have been used to power American aircraft carriers and submarines. New modular reactor designs are smaller, safer, and cheaper than older designs and have the potential to be affordably mass-manufactured. We should not bank everything on a single technology or design; the Defense Department should have the budget to do the same for other promising energy technologies, from advanced solar and geothermal to biofuels and batteries. But longtime opponents of nuclear power must rethink their opposition given the potential of new nuclear plants to solve several energy problems—economic, environmental, health, and safety—at once.

All told, this framework would cost between $15 and $25 billion per year, less than one-third what we spend on defense research. In today’s fiscal climate, any new spending should be paid for and should be linked to the affected sector. This could be done through several mechanisms, starting with a phaseout of subsidies for wind, solar, and fossil fuels alike, an increase in the royalties charged to oil and gas companies for production on public leases, or a $5 a ton carbon tax. The mention of a carbon tax will set off some alarm bells, but this low level (about five cents a gallon of gasoline, less than the seasonal fluctuation in pump prices) would neither affect consumer behavior nor change the economics of fossil fuels. Several environmentalists have expressed disappointment in this modest proposal, unable to grasp that it is intended as a revenue measure, not a behavior- or market-changing measure.

No doubt critics will say this level of state involvement in promoting technological innovation doesn’t sound very Reaganite, but they are wrong. Just as Reagan’s Strategic Defense Initiative was intended to be a long-range game changer rather than just another weapons system, this energy strategy is intended to reestablish the United States as the global leader in energy innovation and potentially upend the geopolitics of energy. I share all of the general reservations and skepticism about
government-sponsored research and development. Yet for all of the boondoggles one can rightly point to, such as Jimmy Carter’s hapless Synfuels Corporation, there is also a record of government-sponsored technology achievement that it would be churlish to overlook. The lesson is that government investments succeed not when they are blanket subsidies but when they are targeted to specific outcomes, such as developing computers to enable rocket systems, building a communications network to survive a nuclear attack, or creating increasingly efficient and powerful jet engines. These public investments and supporting regulatory changes paid off handsomely in personal computers, the Internet, and both commercial air travel and the gas turbines used in modern natural gas power plants. Government-sponsored research in biochemistry has played a substantial role in the development of new pharmaceuticals.

There are no guarantees that this framework will deliver quickly or be free of failures along the way. (To the contrary, if there are few failures it will mean the program isn’t bold enough.) But with China committing as much as $740 billion to basic energy research over the next decade and South Korea dedicating 1 percent of its GDP for the same purpose, the United States risks being a laggard in the energy sector. And that’s more than just an economic risk.


Steven F. Hayward is a resident scholar at the American Enterprise Institute and the author of the forthcoming Almanac of Environmental Trends.



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