Clean energy innovation in the Covid-19 crisis

Investing today to ensure a sustainable tomorrow

Despite widespread agreement on the importance of innovation for tackling energy challenges, public R&D on clean energy is not growing fast enough

Countries and regions that successfully and repeatedly produce new energy technologies have adopted different approaches to innovation, but they all have at least one thing in common: governments fulfill vital roles in spurring and nurturing inventions and incentivising their progress.

Among the most important of these roles is funding basic research and major applied research and development (R&D) projects. However, the latest data on the scale and focus of public budgets for energy R&D around the world indicate that they are not in line with ambitious international climate and sustainable energy goals – even though innovation is essential for meeting those targets.

The world has seen a proliferating number of pledges by numerous governments and companies to reach net-zero carbon dioxide (CO2) emissions in the coming decades as part of global efforts to meet long-term sustainability goals, such as the Paris Agreement on climate change. But there is a stark disconnect between these high-profile pledges and the current state of clean energy technology development and diffusion. While the technologies in use today can deliver a large amount of the emissions reductions called for by these goals, they are insufficient on their own to bring the world to net zero while ensuring that energy systems remain resilient – even with much stronger policies supporting them.

Innovation involves a wide range of participants, but governments have a pivotal role, especially in the wake of the challenges created by the Covid-19 crisis. Through measures such as countercyclical spending on energy R&D and technology demonstration, governments can accelerate clean energy innovation and ensure that the human capital embodied in the approximately 750 000 jobs in energy research and development is preserved and further nurtured. Governments’ economic recovery plans provide a strategic opportunity to ensure that key industries come out of the Covid-19 crisis stronger and ready to supply future domestic and international growth markets.

This is why the IEA will be recommending a strong focus on clean energy innovation to the energy ministers and business leaders participating this week in the IEA Clean Energy Transitions Summit on 9 July. In particular, five key innovation principles for reaching net-zero emissions will be presented, drawing on the recent ETP Special Report on Clean Energy Innovation, as well as an interactive guide to the market readiness of over 400 clean energy technologies. This builds on the IEA’s work identifying more than 100 innovation gaps in efforts to advance clean energy progress.

The IEA’s unique database of public energy R&D funding shows modest progress – and cause for concern

Between 1995 and 2012, IEA member countries doubled their R&D spending on low-carbon energy, including demonstration projects. Improvements to clean energy technologies over this period helped renewable energy sources to outcompete fossil fuels in a growing number of situations today. 

Solar PV and wind power have each received more investment than any other electricity generation technology over the last decade. This was preceded by several decades of improvements in which R&D, business development and policy moved hand-in-hand. Technology improvements enabled more robust policy support – and vice versa. In particular, publicly funded R&D in countries such as the United States, Denmark, Australia, Japan, Germany and China played an important role in pushing forward technological frontiers at each stage of development.

Lithium-ion batteries have followed a similar pattern of development. The costs of both solar PV and lithium-ion batteries have fallen by nearly 95% since 1995. An estimated 60% of the cost reductions for solar PV resulted from R&D, both public and privately funded, rather than from “market pull” measures like preferential tariffs or requirements to include a certain amount of renewables in electricity supplies.

The IEA’s latest collection of data on public funding for energy R&D shows that, between 2012 and 2016, low-carbon energy R&D spending in IEA member countries was broadly stable.1 Annual growth, at 6% in 2019, was stronger than in 2016-18. But average growth since since 2016 has been lower than over the three-year period preceding the 2008 financial crisis.

Today, energy R&D spending faces pressures as government budgets come under strain from global economic turmoil, just as they did in 2008 and 2009. If annual growth remained at 2019’s rate of 6%, it would take 12 years for low-carbon energy R&D spending to double – just a few years fewer than it took for the doubling of spending to occur between 1995 and 2012.

IEA public energy technology R&D and demonstration spending by technology, 1977-2019


Globally low-carbon energy technologies represent around 80% of total public spending on energy R&D, which grew by 3% in 2019 to USD 30 billion. However, the share of GDP represented by overall public spending on energy R&D has remained fairly constant over the last decade. Other public research objectives, such as health and defence, receive around five times more R&D funding than energy.

Public energy R&D as a share of GDP in selected countries, 2012-2019


Public energy R&D as a share of all public R&D by sector, 1985-2019


Public energy R&D as a share of all public R&D in selected countries, 1985-2019


Why public spending on clean energy R&D matters

Public energy R&D replenishes the innovation pipeline, ensuring a stream of new ideas. Given the serendipitous nature of innovation, not all of those ideas will make it to the mass market, but it is important to ensure that the pipeline does not dry up. The essential justification for public intervention in innovation is that new ideas and technologies are undersupplied by the market, which leads companies to prioritise expenditures from which profits are more certain.

In particular, on the basis of past experience, we cannot assume that incumbent companies will provide a sufficient supply of radical new concepts or disruptive technologies, which often arise from basic scientific research. Many incumbent companies instead focus on incremental improvements to their existing technology portfolio. This makes the emergence of new companies in the energy sector one of the key sources of innovation. But markets are not necessarily supportive of these new players. Disruptive technologies can be of particular importance to achieving social or environmental outcomes that are desired by governments but have been ascribed a low value by markets.

Additionally, public spending sends a signal to researchers and businesses about social objectives for technology development, and it attracts private money that would not otherwise have been spent. While there is legitimate concern that public sector R&D might “crowd out” corporate investments, the evidence suggests that the productivity of corporate research is increasingly dependent on ideas arising from publicly funded R&D. If well targeted, public funding for energy R&D may well stimulate more private sector spending, not less.

Clean energy innovation can generate good value for taxpayers. Reviews of six public clean energy R&D programmes in the United States found a return on investment of 27% since 1975, and a benefit-to-cost ratio of 33:1 . Governments can also take on the high risks of certain first-of-a-kind projects that are hard for the private sector to shoulder before technology and revenue certainty is in place. They can even fund this from levies on corporate activities, such as pricing CO2 emissions, as is planned for the European Union’s Innovation Fund, which is currently in development. A rationale for EU intervention is that such projects are often large and complex, and it is inefficient and too risky for one country to support them alone. The energy system relies particularly heavily on these types of large-scale technologies and clean energy transitions anticipate major contributions from large installations like floating wind turbines, nuclear reactors, concentrating solar power, and carbon capture, utilisation and storage (CCUS). Large-scale technology projects will also be needed to tackle emissions from key energy-intensive sectors like steel and cement.

Given the shared benefits associated with the development of new clean energy technologies, R&D in this area is more often conducted internationally, with positive implications for the quality of innovation and knowledge diffusion. Evidence indicates that this is particularly valuable for emerging economies. Significantly, multilateral institutional initiatives can facilitate this process, including the IEA Technology Collaboration Programme.

The pivotal role of governments goes far beyond simply funding research and development. They set overall national objectives and priorities, and are vital in determining market expectations, ensuring the flow of knowledge, investing in essential infrastructure, and enabling major demonstration projects to go ahead. They can coordinate multiple actors across sectors or across competitive divides in order to advance the public interest. They have in the past used their initiative to set incentives for, and work with, the private sector to deliver desirable outcomes. Examples of this include space exploration, vaccines and nuclear power. It is increasingly recognised that many of the biggest clean energy technology challenges could benefit from a “mission-oriented” approach. Support for industrial clusters, strategic use of public procurement, and investment in enabling infrastructure can all play a part in such a coordinated approach, increasing the probability of innovation success.

Clean energy R&D is critical in the current context

The Covid-19 pandemic doesn’t change the urgency of tackling the world’s climate challenge. While near-term responses to the Covid-19 crisis have understandably focused on mitigating health, employment and liquidity risks, attention is now turning to the speed of the recovery, the creation of new jobs and the future shape of the economy. New players with new ideas aiming to displace high-carbon producers and to scale up quickly may find a supportive environment if they are able to enter the market at the right moment. Economic stimulus plans now being proposed in countries around the world offer a once-in-a-generation opportunity to boost clean energy innovation. Many of the sectors that are critical to achieving net-zero emissions have investment cycles of many decades, so there is no time to lose.

A survey by the Smith School of Enterprise and the Environment in mid-2020 found broad agreement – among 231 finance ministry officials, central bank officials, and other economists from 53 countries including all G20 nations – that “clean energy R&D” and “clean energy infrastructure investment” score highest among various stimulus spending options for both positive impact and long-run multipliers.

The evidence suggests that clean energy technology innovation brings particular economic benefits, as well as being essential for the shift to more sustainable energy systems. One study of the automotive sector finds that clean energy innovation is more productive in terms of its ability to stimulate knock-on inventions than innovation activity directed to incumbent technologies. While the macro relationship between jobs and R&D expenditures is complicated, other studies suggest that R&D that supports new high-tech products is correlated with increased employment.

In the immediate future, the world’s capacity to bring new technologies to market will be weaker as a result of the disruptions caused by the pandemic. Market and policy uncertainties threaten to reduce the funds available to entrepreneurs, including via sales revenue. An IEA survey reveals that companies that are developing net-zero emissions technologies consider it likely that not only public R&D budgets but also their own corporate R&D budgets will be reduced. It should be noted, though, that there is little sign of companies that have made commitments to reduce their emissions intensity and test new energy technologies seeking to back away from those commitments. The latest data on early-stage venture capital funding, which supplies valuable resources to high-risk emerging technologies, shows a 30% drop in activity for clean energy technology deals in the first half of 2020 compared with the same period in the two previous years.

Value and number of global energy-related venture capital deals (early and late-stage) by year and by semester, 2008-2020


It is important not to lose momentum. With reduced corporate capital expenditure and R&D budgets, major demonstration projects could run aground or face delays. Emerging economies like Brazil and India, which have recently been raising their ambitions to develop indigenous clean energy technologies, may suffer setbacks unless they can tap into additional budget resources. These countries are identifying specific technology needs for their societies and climates that are not being addressed by companies and researchers in other countries. A prolonged downturn in any country would also carry the risk of the loss of highly skilled and highly mobile staff. More generally, human capital investments in the clean energy space could depreciate.

In 2009, governments launched stimulus packages that doubled clean energy R&D and demonstration spending, which would be equivalent to adding USD 25 billion per year today

Governments around the world, faced with the predicted severe negative impacts of the 2008 global financial crisis, introduced wide-ranging economic stimulus packages by 2009. Among these, several major governments with sufficient economic resources chose to channel money into clean energy innovation. The rationale was generally to pair short-term stimulus measures with longer-term investments in increased productivity and technologies that could reduce CO2 emissions once the economy recovered.

Between them, nine countries doubled their clean energy R&D and demonstration spending between 2009 and 2011, compared with between 2006 and 2008.2 This added over USD 6 billion per year to their aggregate spending over the three-year period from 2009. The Covid-19 pandemic is more global than the 2008-09 financial crisis, with China’s economy harder hit than it was a decade ago. If all countries doubled their clean energy R&D and demonstration spending today, it would add USD 25 billion per year.

Public energy R&D and demonstration funding in selected countries by technology area, 2000-2019


The largest and most wide-ranging example of this approach during the 2008-09 crisis was the 2009 US American Recovery and Reinvestment Act, which allocated USD 7.5 billion to energy R&D and major demonstration projects. The Recovery Act made a notable contribution to the development of lithium-ion battery technology. The funding it provided for US battery R&D funding represented a significant increase in global R&D at a time when electric vehicles were primed for market entry but needed better batteries, and when the United States produced less than 2% of the world’s batteries for hybrid vehicles.

With new battery designs, the cost of electric vehicle batteries fell by 70%, and the number of electric cars sold in the United States rose from 1 500 to 114 000 between 2008 and 2015. By no means can all of this be attributed to the Recovery Act, but there is no doubt that the sector benefited from the timely allocation of resources to different parts of the value chain, not just R&D. As the IEA has noted elsewhere novel electric vehicle battery designs and electrolysers for hydrogen may present a similar opportunity today.

However, the funding increases introduced in 2009 were not all long-lasting. In the four key technology areas of CCUS, bioenergy, hydrogen and electrification (via power storage and smart grids), which are critical for achieving net-zero emissions, funding dropped off sharply. Sustainable funding that allows research programmes to ramp up and keep innovators engaged in multi-year projects should be an important legacy of a clean energy innovation stimulus today.

The composition of energy R&D is at least as important as its scale. Unfortunately, public energy R&D spending is not well-aligned with the technology areas that are key priorities for achieving net-zero emissions. Of the government funding that goes to applied research in specific technology areas, crucial areas such as electrification, CCUS, bioenergy and hydrogen receive three times less than low-carbon power generation and energy efficiency. Technology innovation in those less-funded areas is still desperately needed, since they are critical for decarbonising sectors such as long-distance transport and heavy industry where achieving net-zero emissions will be most challenging.

Global public low-carbon energy R&D allocated to specific technology areas, 2019


Five key principles for energy innovation policies in reponse to the current situation

More than 120 governments around the world have formally discussed implementing net-zero emissions targets by 2050, of which around 20% have formalised these ambitions in policy documents, legislation or laws. Many companies across the energy sector and beyond made similar pledges. For those governments aiming to achieve net-zero emissions goals, and others seeking to boost clean energy technology development in general, the IEA proposes five key innovation principles.

  1. Prioritise, track and adjust. Review the processes for selecting technology portfolios for public support to ensure that they are rigorous, collective, flexible and aligned with local advantages.
  2. Raise public R&D and market-led private innovation. Use a range of tools – from public research and development to market incentives – to expand funding according to the different technologies.
  3. Address all links in the value chain. Look at the bigger picture to ensure that all components of key value chains are advancing evenly towards the next market application and exploiting spillovers.
  4. Build enabling infrastructure. Mobilise private finance to help bridge the “valley of death” by sharing the investment risks of network enhancements and commercial-scale demonstrators.
  5. Work globally for regional success. Co-operate to share best practices, experiences and resources to tackle urgent and global technology challenges, including via existing multilateral platforms. 

These principles primarily address national policy challenges in the context of global needs, but are relevant to all policy makers and strategists concerned with energy technologies, transitions and resilience. Maintaining and increasing clean energy R&D spending as a response to the Covid-19 crisis is a key element of this approach. We recommend that this be coordinated with improved priority-setting to select stragic technologies and ensure efficient uses of funds by mobilising the private sector and working internationally.

The IEA’s recent Energy Technology Perspectives Special Report on Clean Energy Innovation provides insights into the types of technologies that might help accelerate innovation timescales as well as quantifying the market opportunity for successful innovators. It complements the World Energy Outlook Special Report on Sustainable Recovery, which provides a plan for the next three years enabling governments around the world to boost their economies, create millions of jobs and put global greenhouse gas emissions into structural decline.

European Union

This article has been produced with the financial assistance of the European Union as part of the Clean Energy Transitions in Emerging Economies programme. This commentary reflects the views of the International Energy Agency (IEA) Secretariat but does not necessarily reflect those of individual IEA member countries or the European Union (EU). Neither the IEA nor the EU make any representation or warranty, express or implied, in respect to the commentary’s contents (including its completeness or accuracy) and shall not be responsible for any use of, or reliance on, the publication.

The Clean Energy Transitions in Emerging Economies programme has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 952363.

  1. Members of the IEA and the European Union undertake to report data on energy R&D and demonstration budgets annually and the IEA compilation represents a uniquely long statistical time series. Participation is also open to all countries wishing to strengthen the dataset and benchmark their programmes.

  2. Canada, France, Germany, the Netherlands, Norway, Spain, Sweden, the United Kingdom and the United States. Consistent data for the European Commission is not available for the whole time period, and is not included here.