This is part 2 of 2. Read part 1 here.

There are pressing reasons why innovation funding needs to move beyond its current tech-centric approach (as explained in part 1). Most important, economies grappling with deep de-carbonization — such as Germany and California — have made it clear that our suite of clean energy policies is no longer sufficient and may be counterproductive.

Deeper emission cuts require policy resets. Bill Gates has said as much himself:

A little bit of the trap people get into is they think, okay if we’re meeting some 2030 goal, we must be on the way, because we just do more of what we did. Well, a lot of things you do, like, take [away] coal and build natural gas, for your 2050 goal … actually [are] a step backwards because that gas plant is at a higher CO2-per-kilowatt-hour than you’re going to want to have in 2050.

Yet, in Germany, often seen as a clean energy pace-setter, even shifting to more gas-fired power is problematic. During the past decade, that country’s generous feed-in tariffs for solar (compensating users for selling power to the grid) provided billions of dollars in annual subsidies for new photovoltaic installations. Over 40 GW of solar were added to the grid (double that of the U.S.), and PV production costs were driven down globally, providing an enormous public good. 

But as renewables flooded the German grid, wholesale electricity prices fell, pushing higher priced yet lower-carbon generators out of the market. Old lignite-fired power plants ran 24/7, while modern gas-fired plants emitting half the greenhouse gases stood idle. Germany steadily has reduced its feed-in tariffs (fixed fees will be replaced by competitive bidding in 2017), but the long-term path to a cleaner grid remains uncertain, especially given its ongoing phase-out of nuclear power. 

One reason is that, without grid subsidies, interconnecting larger and larger volumes of solar PV presents an economic dilemma, as highlighted in MIT’s recent Future of Solar Energy report. In competitive markets, as PV penetration rises to meet peak demand, the incremental price paid to solar generators steadily falls, ultimately making further solar investment uneconomic. Energy storage systems significantly can raise the economic plateau for PV but, again, only if policy goals and incentives are adjusted years in advance.

California faces similar quandaries. Residential rooftop solar is booming and the state recently extended the current system, net energy metering, for defraying the cost of such installations. In 2015, California also voted to raise the Renewable Portfolio Standard (RPS) for utilities to 50 percent by 2030; the RPS rules mandate 30 percent renewables by 2020, much of which is being sourced from massive desert solar arrays.

Despite the large business and environmental stakes involved in forging policy paths for deep emission reductions, ongoing research in this area commands but a fraction of the R&D dollars focused on basic science, technology and products.

These trends are ringing alarm bells with grid planners because they foresee larger and larger swings (PDF) in the power delivered to the grid (such as on cloudy days) — leading to rising grid backup costs and higher greenhouse-gas emissions (such as from additional fast-ramping natural-gas-fired plants). To mitigate these potential grid swings and emissions, a new suite of policies is needed — policies that not only boost renewables on the grid, but offer the right mix of renewables and grid storage technologies.

Here is one last example of the need for added investment on the policy front: next-generation nuclear power, frequently viewed as a key part of any sustainable global program for decarbonizing electricity. The quest for modular, small-scale nuclear generators that are both safe and cost-competitive has won significant investment from governments and venture capitalist alike. Gates’ own company, Terrapower, has been working on innovative reactor designs for almost a decade.

"[T]he best case" for Terrapower, said Gates, "is that we have our pilot plant built by 2023, and that by 2030, this fourth-generation inherently safe design … becomes the standard for all nuclear builds from that point forward."

If emissions reductions — not market shares — are the metric for judging next-gen technologies, then we will need a growing number of aligned R&D policy groups.

This is an extremely ambitious goal, even given the time frame. But Terrapower may need all of that time and then some to navigate the regulatory process for any nextgen nuclear technology. While some countries may be willing to fast track or host pilot trials for "inherently safe" technologies, that is unlikely to be so in the U.S., which may take up to a decade to approve new reactor designs. The Nuclear Regulatory Commission process for licensing an advanced reactor (with thorium or depleted uranium, as with Terrapower) is still unsettled (PDF).

Further, in the wake of Japan’s Fukishima disaster, the public remains deeply ambivalent about nuclear energy. Hence, at best it is likely to take years of policy and regulatory groundwork to convince people that next time around, whether due to the absence of radioactive waste issues or low proliferation risks, nuclear power really could be different, notwithstanding the technology’s potential merit.

Balancing the innovation spend 

All of which brings us to the second point: Despite the large business and environmental stakes involved in forging policy paths for deep emission reductions, ongoing research in this area commands but a fraction of the R&D dollars focused on basic science, technology and products. 

Governments and private investors alike consistently underweight the importance of the type of "soft" or institutional R&D that can make or break any energy invention. As noted earlier, economy-wide tools, such as carbon prices or emissions trading, are insufficient.

In the U.S., a handful of philanthropists — chiefly, the Energy Foundation, Bloomberg Philanthropies, the Hewlett Foundation, Climate Works and the Robertson Foundation — as well as a few wealthy individuals (Jeremy Grantham and Tom Steyer, who also has backed the Breakthrough Energy Coalition) likely account for a majority of independent funding toward energy policy. None of these donors has a dedicated program designed to accelerate the takeup of promising clean-energy technologies over the coming decades.

Likewise, a relatively small number of nonprofit organizations account for the bulk of policy R&D needed to decarbonize America’s energy supplies. They include several university departments as well as think tanks and environmental groups. 

Hence, at best it is likely to take years of policy and regulatory groundwork to convince people that next time around, whether due to the absence of radioactive waste issues or low proliferation risks, nuclear power really could be different.

The activities of some "green" NGOs also may be advanced by lobbyists from clean-energy trade associations and their corporate members. This is especially so when it comes to tax policy or utility bill concessions. By its very nature, however, lobbying work is a self-interested activity.

So let’s be honest: When it comes to clearing a regulatory path for deploying breakthrough energy innovations, it makes no more sense for today’s renewable energy lobbies to gate the future than to cede this role to utilities. 

If emissions reductions — not market shares — are the metric for judging next-gen technologies, then we will need a growing number of aligned R&D policy groups. And they will need an appropriate degree of patient long-term financing (just as the Breakthrough Energy Coalition, or BEC, proposes for promising startups) to secure their independence from the existing order. 

What is to be done? 

Here are four ideas worth considering. As with the discussion above, they are largely U.S.-centric and far from comprehensive. 

1. Gates and the other billionaires funding BEC should allot a significant slice of new funding for innovative energy market and policy work by NGOs, universities, think tanks and relevant trade associations. A 20 percent budget set aside by BEC or equivalent capital raise during the fund’s first five years would be a good start. This kind of market shaping and applied policy work typically goes beyond the political remit of publicly funded R&D programs — and private philanthropists, such as the Energy Foundation and Bloomberg, cannot be expected to carry this burden alone. 

Moreover, as noted earlier, no large environmental donor is expressly focused on accelerating the diffusion of next-generation clean energy technologies. In the U.S., most are preoccupied with winning the battles of the moment (such as defending the Clean Power Plan) and preserving the status quo for wind and solar incentives. More is required.

As the Economist’s special climate issue admonished last year, "Generous subsidies perpetuate today’s low carbon technologies; the goal should be to usher in tomorrow’s."

2. New private funding initiatives, such as BEC, should routinely involve energy policy and regulatory experts, along with investment bankers, technology experts and lawyers, in building their investment portfolios. This is just good business sense. It may well help portfolio companies shorten or altogether avoid the proverbial "valley of death."

After all, in many cases, the valley is manmade, a false chasm created by protective regulatory policies and legacy market players. Regularly canvassing the options and timeline for policy reforms thus may avoid premature market trials and lead to wiser targeting of available capital.

Along similar lines, any fund that places a large strategic bet on a particular energy technology or sector (such as storage, next-gen transport fuels) also should be willing to make a proportionate investment in policy and market R&D. This effort should not simply be left to portfolio companies, most of whom lack the right staff and in any case will be preoccupied with company-specific engineering, product development and production issues.  

ARPA-E’s "sunshot" initiative may provide some lessons here. To help PV solar to become grid-competitive, the agency not only has spent millions on R&D for advanced PV technologies but also provided grants to spur new consumer delivery models.

One is shared or community solar — a promising way to bring renewables to millions of urban consumers who can’t site PV where they live. This ARPA-E strategy goes beyond the traditional public R&D funding model but it can speed time to market for innovative products.

DOE also has created an innovation portal to commercialize DOE-funded technology. Likewise, it has sought to leverage the policy expertise of the national energy labs, but the effort is diffuse and not well targeted, given the political hazards of "picking winners" or favoring special interests. Which is all the more reason why the private sector and philanthropists need to step up their game. 

3. Special attention is needed for de-carbonizing the transportation sector. This has become the Achilles heel of most climate action campaigns. Notably, California’s landmark 2015 legislation to increase building efficiency by 50 percent and adopt a 50 percent RPS ultimately left aside a companion provision to reduce the state’s oil consumption by 50 percent. The petroleum industry argued that the later goal was infeasible and would lead to punishing new taxes at the gas pump. 

Like the electric sector, however, great changes may be in store for personal transportation  —  changes which could make it easier to cut back the use of fossil fuels, provided we have the right policy framework. The sharing economy, mobile apps and self-driving vehicles have shown the way, courtesy of Airbnb, Uber, Google and others.

What better place to site a new American Center for Energy Innovation replete with research, investment, public policy and conference facilities so that the disparate strands of the innovation effort have a common home.

Today, the chief U.S. tool for curbing GHG emissions from transportation is the EPA’s mileage standards for auto manufactures, the corporate average fleet economy rules. The latest version requires the average new car sold to get about 50 miles per gallon by 2027. But if we want to discourage more tailpipe emissions, why encourage the manufacture of more gasoline or diesel-powered cars at all? 

Why not de-couple a portion of the industry incentives from the fleet standards (such as cars produced) and find appropriate ways to reward the auto industry for reducing miles driven, boosting car-sharing and shifting passenger miles to cleaner public transport services? We might also experiment with bi- or tri-fuel clean engine mandates. And why not use public incentives to encourage an open-source platform for electric vehicle drive trains to accelerate innovation (as, for example, with open-source computing)?

In short, there is a very large scope for policy R&D to speed the nascent clean-tech revolution in the auto sector, with the promise of carryover benefits in other sectors (such as batteries, advanced bio-fuels).

We have a very long way to go. Global sales of new gasoline and diesel powered cars topped 85 million in 2015, outselling electric vehicles by roughly 100 to 1. What’s more, in the U.S., sales of EVs leveled off last year at about 120,000.

4. The time is ripe for creating a permanent U.S. center to champion energy innovation and host the dialogues needed for low-carbon policymaking. As it turns out, a marquee site is available on the banks of the Potomac River just across from the National Mall in Washington. This unique 25-acre riverfront property, currently leased to NRG, houses a 1940s-era, coal-fired power plant decommissioned in 2012. 

What better place to site a new American Center for Energy Innovation replete with research, investment, public policy and conference facilities so that the disparate strands of the innovation effort have a common home. American Clean Skies Foundation, which I head, published the 70-page Potomac River Green plan in 2011 (see part 1 of this story) to repurpose this coal plant site for just such a purpose. The site would also be repowered with a new clean microgrid.

All the plan needs is a visionary billionaire to seize the opportunity and, quite literally, put energy innovation permanently on the national map for all to see.