Innovation policy for directing technical change in the power sector

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.