We need innovation in energy to stave off two large sets of risk. The first is the damage that climate change and extreme weather does to cities and crops. The other risk is the economic damage caused by drastic spikes in the rise of the price of oil. Both are happening now.
In 2012, massive drought caused the U.S. corn crop to fall four billion bushels (or 28%) short of projections. Meanwhile, three separate studies from academia and the Federal Reserve have found that spikes in the price of oil — like we saw in 2008 — increase the risk of global recessions. Economist James Hamilton finds that oil price spikes predicted 10 of the last 11 recessions. We need energy innovation to reduce economic and physical risks.
Yet energy innovation itself faces significant risks from policy uncertainty. In late 2012, the uncertainty over the production tax credit for wind energy sent the wind industry into chaos, disrupting investment for 2013. In Europe, austerity-driven cutbacks on green energy investment disrupted both wind and solar development.
These uncertainties jeopardize not only deployment but also R&D spending, which is a leading factor in lowering the true underlying costs of renewables. There is little doubt that we need to transition to renewables, or that eventually we will have policies in place to limit carbon emissions, but the timing, structure and year-to-year consistency of those policies are all complete unknowns.
Power plants, wind farms and solar installations have high capital costs and lifetimes of 30, 40 or even 50 years. Developers, utilities and investors need long-term clarity on the policies that govern them. That lack of long-term clarity is the greatest risk to innovation in the domain in which we need it most.