The study unravels the mechanism behind directed technical change, explaining why markets may underprovide innovations in expensive renewable technologies in comparison to innovations in energy-efficient fossil-fuel generators. The technical change in electricity generation technologies is characterized by the heterogeneity of knowledge spillovers both within and between clean electricity generation technologies. Therefore, there exists a rationale for a portfolio approach to innovation in the electricity sector. In other words, optimal innovation policies are neither fully generic nor fully specific; they need to be adapted in response to new information learned by the government. The existing innovation literature does not, however, provide a clear-cut answer for designing such a policy. By comparing policy instruments, it is argued in this paper that public R;D support to clean technologies, either in the form of subsidies or prizes, seems to be the prime candidate for implementing non-generic innovation policy.

Download this discussion paper from the Netherlands Bureau for Economic Policy Analysis website.