The Dollar Value of Energy Innovation, with Daniel Shawhan

Notable Quotes:

• Advanced energy is a major topic on Capitol Hill: “Congress might increase funding for these advanced energy technologies [as] part of a stimulus, possibly as part of the infrastructure legislation that’s being negotiated between Democrats and Republicans right now … It’s a really big, important decision year for this RD&D, and our purpose is to provide reliable, rigorous analysis that policymakers all across the political spectrum can trust to help them decide what positions to take and how to craft the funding or other decisions on the development of these clean emerging technologies.” (6:26)
• Major benefits arise from RD&D investments in clean energy technologies: “We simulated the future without any new national clean energy or environmental policies, just with a fairly conservative set of assumed state and utility clean energy policies. With those parameters, we estimated that the average benefit-to-cost ratio per technology is about seven. What this means is that for every $1 of additional RD&D spending, both by the government or via the private sector, you get about $7 of benefits. Those are mainly in the form of reduced electricity bills and reduced emissions.” (23:01)
• Further investment can accelerate benefits: “As you shift the range of likely costs of each technology downward, the benefits of the cost reduction actually grow at an increasing rate. The reason for this is that as you shift the range of likely costs of the technology down through greater RD&D, the technology becomes more likely to be widely used, and that means that the cost reductions apply to a larger amount of generation.” (28:20)

Top of the Stack

• “The Value of Advanced Energy Funding: Projected Effects of Proposed US Funding for Advanced Energy Technologies” working paper by Daniel Shawhan, Kathryne Cleary, Christoph Funke, and Steven Witkin
• “The Value of Advanced Energy Funding: Projected Effects of Proposed US Funding for Advanced Energy Technologies” issue brief by Daniel Shawhan, Kathryne Cleary, Christoph Funke, and Steven Witkin
• "Benefits of Energy Technology Innovation Part 2: Economy-Wide Direct Air Capture Modeling Results” by Marc Hafstead
• “Why Does Disaster Aid Often Favor White People?” by Christopher Flavelle in the New York Times
• TextAloud text-to-speech software

The Full Transcript

Daniel Raimi: Hello, and welcome to Resources Radio, a weekly podcast from Resources for the Future. I'm your host, Daniel Raimi. This week, we talk with RFF Fellow Dan Shawhan about a new working paper that he and several RFF coauthors recently published on the value of advanced energy funding. The study assesses how government funding for research, development, and demonstration of emerging clean energy technologies can help reduce the costs of deploying those technologies in the future. They included advanced nuclear and geothermal energy, carbon capture and storage, electricity storage, and direct air capture of carbon dioxide. Dan and his team also estimated how bringing down these costs can benefit society by reducing air pollution, electricity bills, and more. It's a fascinating and important analysis. Stay with us.

Okay. Dan Shawhan from Resources for the Future. My colleague and a second time guest here on the podcast. Thank you so much for joining us today on Resources Radio.

Daniel Shawhan: My pleasure, Daniel.

Daniel Raimi: Dan, you've been on the show before and I don't want to rehash the past too much, but if you could just remind listeners how you got interested and started to work on environmental issues, I think that would be a great way to start us off.

Daniel Shawhan: I'll actually give a part two of the answer that I gave before about what motivates my interest in this work. My father died in his forties on a summer day, years ago, and that caused an unspeakable amount of grief and loss for my family. I know that that is true for most others who lose loved ones at early ages. That really convinced me to embrace the mission of trying to reduce the number of people who suffer misery. I think that energy and emissions policy is a good way to do that, especially for people in the United States and certain other countries. It's not just because of climate change. It's also because of other pollutants, especially fine airborne particulate matter from power plants and cars and industry and fires and other sources.

These pollutants cause heart attacks, strokes, and respiratory illnesses. The estimated number of premature deaths per year globally from fine airborne particulate matter is in the millions, and the number of deaths per year in the United States from fine airborne particulate matter is in the tens of thousands. It's a shocking problem that not everybody knows about. It's still a shocking problem in the United States, but it's actually also a success story. The problem is not as bad in the United States as it is in a lot of other parts of the world. That is because policies influenced by RFF researchers and other researchers have greatly reduced the air pollution in the United States. When my dad died, there were hundreds of thousands of people who died per year as a result of air pollution. These people had heart attacks, strokes, cardiovascular problems, etc. earlier in life because of air pollution. Now it's down to tens of thousands per year. I would argue that much more ought to be done, but there is a track record of success in making the problem considerably smaller than it used to be. And I hope that that can happen elsewhere in the world as well.

Daniel Raimi: Indeed. First of all, thank you for sharing that. I didn't know that story about your dad, and it's really fascinating to hear how much of a motivating factor that is. After the last year and a half that we've all lived through, those feelings of loss and grief are center stage for so many of us.

Daniel Shawhan: Absolutely.

Daniel Raimi: Thank you for bringing that to the show. We are going to talk today not about particulate matter, but about some technologies that can help reduce particulate matter as well as other pollution. So we're going to talk about a working paper that you recently published with RFF colleagues called “The Value of Advanced Energy Funding: Projected Effects of Proposed US Funding for Advanced Energy Technologies.” Folks can find a link to it in the show notes, if they want to read along as they're listening to us talk. We're going to talk about what you found in that analysis in just a minute, but can you start by giving us a sense of why this research question is particularly important right now?

Daniel Shawhan: One of the reasons it's particularly important right now is that Congress has to decide how much money to allocate to research, development, and demonstration—I'll call that RD&D—for advanced energy technologies those clean energy technologies that are just emerging. There are a couple of reasons why, this year, Congress might significantly increase funding. The first is that a significant, truly bipartisan clean energy bill passed Congress a few months ago. It's the Energy Act of 2020, which passed in December and was signed by President Trump as part of a big omnibus bill that included a lot of other things. It authorized more than a billion dollars a year of additional funding for the five emerging clean energy technologies that we consider in our study. But it's only an authorization, and the way most US government funding works is that Congress has to decide how much funding to actually allocate. They have to decide that in this first pivotal year for 2022, and then they have to decide that in each successive year. By the way, the first two of our four reports in this project came out before the decision on the passage of the Energy Act of 2020.

The second reason that Congress might increase funding for these advanced energy technologies is as part of a stimulus, possibly as part of the infrastructure legislation that's being negotiated between Democrats and Republicans right now, or as part of another stimulus. It's a really big, important decision year for this RD&D, and our purpose is to provide reliable, rigorous analysis that policymakers all across the political spectrum can trust to help them decide what positions to take and how to craft the funding or other decisions on the development of these clean, emerging technologies.

Daniel Raimi: That's great. Thank you, Dan. And yeah, that distinction between authorization and appropriation is one that people in DC probably understand, but many others do not, and it's such an important one. You also gave me the chance to not ring my acronym bell, because you spelled out the most important acronym of the day, which is research, development, and demonstration, but I've got it here, so I'm just going to play it anyway.

Daniel Shawhan: Okay.

Daniel Raimi: Now that's all done with the acronym bell. You've mentioned a couple of times that there are five advanced energy technologies, but I don't think you've told us what they are. So can you highlight what they are and help give us a sense of where they are in terms of their current technological readiness and cost?

Daniel Shawhan: They are the five emerging clean energy technologies mentioned in the Energy Act of 2020, and the ones which the act authorizes additional funding for. The five are advanced nuclear, advanced geothermal, carbon capture and sequestration from natural gas and coal, electricity storage, and direct from air capture of carbon dioxide. What these all have in common is that they are all emerging technologies that can allow the energy system to advance past the emission reductions that you can inexpensively achieve with wind, solar, and the other existing clean resources, like dams and nuclear power plants. All five of these technologies can help go beyond what wind and solar, with their variable patterns, can achieve. The most ready of them is electricity storage. In the last couple of years, electric power generation companies and utilities have started building large battery banks that are connected to the grid, and they are substitutes for new power plants and transmission lines. So some kinds of storage have now reached the point of being commercially viable.

I would say the next most ready of these technologies is carbon capture. I know this is news to some people, but carbon capture from coal or natural gas is already occurring in several places around the world, including in North America. That one is off the ground. For both of these, there is hopefully a lot of potential to make them considerably less costly through research, development, and demonstration. The least ready technologies of this set of five are probably advanced geothermal and direct air capture of carbon dioxide. Anybody who's interested can go to rff.org, and there you can search for explainers on all five of these technologies.

I think they're all interesting, but the one that I want to highlight is advanced geothermal. Conventional geothermal uses places where there's hot steam underground. Those are few and far between, so there aren't enough places like that to really rely on them for power generation or industry. So advanced geothermal would typically tap a place which is hot underground, but has no steam. Typically you have to drill quite deep, several kilometers down, to get to those temperatures—everywhere, if you drill deep enough, you get to very high temperatures.

Daniel Raimi: Essentially, you get to the middle of the lollipop.

Daniel Shawhan: Yes. But even if you just go a few kilometers, you get to pretty high, or in some cases, very high temperatures. There's a lot of promise here to apply technologies that have been developed in the last 20 years or so for natural gas extraction to advanced geothermal, where you drill deep enough and then you introduce a fluid that goes through the hot rock down there. Then, you have to recapture it and bring it up, and then you can use it to drive power plants or industry. However, the temperatures and often the depths are a lot greater for geothermal than they are for natural gas extraction. So there are adaptations needed, and that's a part of what the RD&D for advanced geothermal would be about.

Daniel Raimi: That's so interesting. We had a previous podcast on this topic, which was actually called “Hot Rocks,” which was a Rolling Stones reference, with Tim Latimer of Fervo Energy. We actually didn't talk about the fluid injection, but it makes me think that maybe I should add a chapter to my book about fracking.

Daniel Shawhan: I remember that you didn't talk about that, so I didn't feel bad about mentioning it.

Daniel Raimi: So Dan, let's move now to the study itself. Talk first a little bit about the methods that you used, and then we'll talk about the results. To state the obvious, we don't know what's going to happen in the future, which means it's hard to estimate how RD&D funding today will affect future costs relative to a baseline of no additional RD&D funding. Can you help us understand how you went about estimating those future costs? Because I know it was a really interesting process.

Daniel Shawhan: Actually, a segue from what we were just talking about is that part of our methods involved getting estimates from experts, and Tim Latimer was one of our experts for geothermal.

Daniel Raimi: Oh, cool.

Daniel Shawhan: Our overall goal in this project is to predict the effects that additional RD&D funding for these five emerging clean energy technologies will have on their costs and on society. It's really difficult to do that well. We ended up using a combination of two pretty challenging methods. One is some pretty rigorous expert elicitation, where we asked for projections from experts in a very structured and detailed method. The other is simulation modeling of the power sector and the whole economy. The first half of that is to project the effects of the additional RD&D funding on the cost of the technologies, which is the part for which we used expert elicitation. It was time-consuming and challenging for us and the cost experts. We had to identify more than 150 qualified experts in order to get about 5 per technology, so that's about 25 in total, because these are very busy people.

It takes a tremendous amount of expertise in a key combination of fields to be able to project what the effects of additional RD&D funding on the cost of a technology will be. We put those 25 researchers through what may be the most grueling energy technology expert elicitation ever. We needed cost projections for 2035. But, we needed them in the case that the legislation was not enacted, and we needed them in the case that the legislation and additional funding were enacted.

This was tough to do because we had some unusual needs. We needed detailed cost data and performance data for the technologies in each of the scenarios, and we needed to harmonize their answers so that we could use the same fuel cost assumptions for all five experts' answers. So we had to harmonize them in that kind of way. Also, we were going to use those estimates in sophisticated simulation modeling that requires knowing the fixed costs, the variable costs, the cost to build etc. So in each scenario we needed to know about at least 10 different kinds of costs or performance characteristics for the technology, which I mentioned a few of. For some of the technologies, it was even more than 10 characteristics.

We also had to take into account uncertainty. The experts could give us a central estimate, but the technologies might end up being a lot harder to make inexpensive than they think, or they might end up being easier to make inexpensive than their central estimates. So in each scenario, we asked them for an optimistic, a medium, and a pessimistic cost projection, where each of those is defined in a mathematical way as the 10th, 50th, and 90th percentiles of levelized costs, respectively. Designing this to be rigorous, clear, and exactly suited to our necessary purposes required a lot of hard thinking. It required breaking new ground methodologically and it required careful crafting and testing. It included revising our expert elicitation with very detailed questionnaires and protocols.

For each of the experts, it took several hours of really difficult judgments to answer our detailed questionnaire, and then to talk with us to make sure that they understood all the questions in the way that we had intended. We paid them each a thousand dollars, but they have a lot of expertise and they really did this as a service to us, so we're very grateful to them.

The second half of the analysis is the simulation modeling. For most of the technologies, we just simulated the power sector. We took the cost projections from the experts and we used them in simulations. The key question here was if the costs fall by the amounts projected by the experts, how large would the benefits to society be in terms of lower bills and lower emissions and so on?

Daniel Raimi: Great. So let's get to some of the results. What did the experts say about the different technologies? Then next we'll talk about the benefits to society.

Daniel Shawhan: One of the things we asked the experts was how much additional private RD&D spending would be stimulated by this additional federal funding of RD&D. The average answer was $1.17 of additional private RD&D spending stimulated by each dollar of additional federal RD&D spending. Now on to answering your question, the experts projected on average, across the technologies, that the additional RD&D funding in the Energy Act of 2020 would reduce the costs of the technologies in 2035 by 22 percent. That is, in 2035 the cost of the technologies will be 22 percent less than they would be in 2035 without this additional RD&D funding. The range goes from a 29 percent effect on cost for geothermal and direct air capture of carbon dioxide down to a 9 percent cost reduction for carbon capture and sequestration from natural gas.

The reason that the cost reduction is largest for advanced geothermal and direct air capture of carbon dioxide might be that those are the technologies in the earliest stages of development, as I mentioned earlier. There are still relatively low cost things that can be done to reduce the costs of those technologies. The reason that the projected cost reduction for carbon capture and sequestration is the lowest might be that if you're building a power plant with carbon capture and sequestration, a lot of your costs—probably more than half—actually just come from building and operating a power plant. That's a very mature activity and there aren't a lot of easy, low cost opportunities for reducing the cost of that. So if you are putting up a new power plant with carbon capture, there are fewer parts of it for which you can inexpensively achieve cost reductions.

Daniel Raimi: All right. So you've given us the range of cost estimates from the experts, but you also mentioned earlier that we're not just talking about technology costs, we're talking about benefits to society from these government investments in RD&D. Can you describe what some of those societal benefit estimates were in your analysis?

Daniel Shawhan: Yes. First let me say that the additional spending on RD&D in the bill is not projected to come close to eliminating emissions. However, it does reduce emissions and costs for industry and electricity bills quite significantly. It also reduces the cost of things made with energy, and there can be spillover benefits. For example, if it makes rechargeable batteries cheaper, then anything that uses rechargeable batteries, which may have nothing to do with power generation, is likely to become less expensive as a result of this additional RD&D funding. To estimate the benefits of the cost reductions, estimated by the experts, we need an economic model that can project how much each technology would be used at each projected cost level, and how much that would both reduce costs for customers and reduce environmental damage. So for this, we use a model of the power sector called the Engineering, Economic, and Environmental Electricity Simulation Tool or E4ST.

It allows us to project the effects of these cost reductions just in the power sector. The study is also conservative in some other ways: among other things, we assume that the costs don't go down further after 2035, and we assume that the benefits of the cost reductions only occur from 2040 to 2060. We simulated the future without any new national clean energy or environmental policies, just with a fairly conservative set of assumed state and utility clean energy policies. With those parameters, we estimated that the average benefit-to-cost ratio per technology is about seven. What that means is that for every $1 of additional RD&D spending, both by the government or via the private sector, you get about $7 of benefits. Those are mainly in the form of reduced electricity bills and reduced emissions. For two of the five technologies, the benefit-cost ratio was actually less than one. That was for CCS—carbon capture and sequestration from coal and natural gas—and for direct air capture of carbon dioxide. But for the other 3 technologies, the benefit-cost ratio was between 6 and 20.

Daniel Raimi: Wow.

Daniel Shawhan: I've mentioned benefit-to-cost ratios, but I haven't told you the actual dollar totals of these benefits. The estimated benefit per technology, on average, is about $30 billion. That's a net present value. $30 billion per technology, assuming that the additional funding in the Energy Act of 2020 lasts for 10 years. So a very large estimated benefit.

Daniel Raimi: That is fascinating. I wish I could dig more into these and I'm sure our listeners do too. If you’re interested, we would refer you to the paper to really dig into this stuff. Let me ask you one more question before we go to our Top of the Stack segment, which is about policy. You mentioned a moment ago that you assume no new major federal climate policy or other related energy policy that would affect emissions or these technologies. But you also did some sort of sensitivity analysis where you've tried things out with additional policies, like a cap-and-trade program or a clean energy standard. Can you give us a sense of how those policies affected your estimates?

Daniel Shawhan: So the other policy scenario we used as a background in the simulations was a world with a national clean electricity standard that requires that electricity generation in the United States be 94 percent clean. So roughly speaking, that means 94 percent of energy has to come from non-emitting sources, and six percent can come from things like coal and natural gas with regular emissions. That might make the cost reductions more valuable because now you really need these technologies and something like them is required. We do indeed see that in the simulation result with that kind of moderately stringent national clean electricity standard. We get an average benefit-to-cost ratio from the additional RD&D funding of greater than 10. So now for each dollar of additional RD&D spending, the benefits to society are more than $10. For all five of the technologies, the benefit-to-cost ratio is also now more than five.

The total dollar value of the benefits in this case is about $40 billion per technology. Overall, I would say that these are conservative estimates, partly for the reasons that I've already mentioned, and partly because we only estimate the benefits in the US’s power sector. We don't estimate them outside the power sector in the United States, and we don't estimate them for any sector outside of the United States. There's about four times as much power generation outside of the United States as there is in the United States, and there's also a lot of energy use and a lot of opportunities to reduce emissions outside of the power sector. So these technologies could also be very valuable. All of them actually have very significant potential applications outside of the power sector. For one of them, we actually have a whole economy-wide analysis done by our RFF colleague Marc Hafstead. His model was very well suited to an analysis of the economy-wide effects of making direct air capture of carbon dioxide less costly. He estimated that the benefits of additional funding for that technology are 27 times the cost, or more than 5 times the benefits that we got in the electricity sector model.

Daniel Raimi: Well, that's so interesting.

Daniel Shawhan: There are a couple other things I'd like to mention. One is that making the technologies less costly is perhaps the best way to encourage reductions in other countries, and could be great for US export revenues, since we’d be selling these technologies overseas. So all in all this additional funding for research and development and demonstration seems like an amazingly good investment. We actually have something to say about further RD&D funding beyond the Energy Act of 2020. We observe in the results that as you shift the range of likely costs of each technology downward, the benefits of the cost reduction actually grow at an increasing rate. The reason for this is that as you shift the range of likely costs of the technology down through greater RD&D, the technology becomes more likely to be widely used, and that means that the cost reductions apply to a larger amount of generation. So the benefit of those cost reductions becomes larger.

This implies that additional funding beyond what's in the Energy Act of 2020 could actually produce larger benefits per dollar than the funding that's in the Energy Act of 2020. Normally we expect that additional spending on something produces diminishing returns, but in this case, there's reason to believe that there could actually be increasing returns to investment. This has implications for federal infrastructure legislation and for other potential stimulus funding of RD&D.

Daniel Raimi: You're articulating so many of the reasons that RD&D activities are often looked upon favorably, right? They have some bipartisan support, and they're valuable in so many parts of society, and your work quantifying them is so fascinating and useful. Once more, I'll just direct listeners to the paper, which we'll link to in the show notes so they can dig into all the juicy details. But let's close it out now Dan, with our last question, our Top of the Stack, so asking you what you've read or watched or heard recently that you think is really interesting, and that you'd recommend to folks.

I'll start off with an article that I actually read just a couple of days ago in the New York Times, which is called, “Why Does Disaster Aid Often Favor White People?” by Chris Flavelle from June 7, 2021. It's just a fascinating anecdotal look, with some data behind it as well, on how recovery funding from the Federal Emergency Management Agency and other organizations often disproportionately favors white people. It has something to do with housing markets and the legacy of redlining and other discriminatory practices. It's just a really fascinating, eye-opening piece for me that I think other people will find interesting too. How about you, Dan? What's on the top of your stack?

Daniel Shawhan: I second that. I'd like to mention not a specific article or anything, but a way of consuming written material that I use a lot, and that is to convert it to audio and listen to it while I'm doing other relatively mindless things, like chores and commuting and exercising. When I encounter something that I'd like to listen to, maybe I don't have time to read it then, but I think I'd like to listen to it later. I copy it to a Word document and then when that document gets long enough, I paste the text into text to speech software, such as TextAloud. This is quite inexpensive software. That converts it into an audio file, which uses a pretty smart, digital voice that does even sentence inflection pretty well. Then I just copy that to my phone and listen to it as I said, when I'm doing other things. It's a way of being able to do a lot more reading, so to speak, then I'd otherwise be able to do.

Daniel Raimi: That is great. I think that's our first meta recommendation. It's like a recommendation about ways to enjoy things. That's really great Dan, thank you. Well, one more time, Dan Shawhan from Resources for the Future. Thank you so much for coming on the show, talking to us about this fascinating work. Congratulations on finishing up the paper to you and the whole team.

Daniel Shawhan: Thank you very much, Daniel, and to Elizabeth and the others who make the program possible. I also want to acknowledge my very important other team members, Kathryne Cleary, Christoph Funke, and Steven Witkin. And I expect that some of you listeners will be hearing from them in the future because they are all tremendously capable and motivated people.

Daniel Raimi: Absolutely. Thanks so much, Dan.

Daniel Shawhan: Thanks Daniel.

Daniel Raimi: You've been listening to Resources Radio. Learn how to support Resources for the Future at rff.org/support. If you have a minute, we'd really appreciate you leaving us a rating or comment on your podcast platform of choice. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental energy and natural resource decisions through impartial economic research and policy engagement.

The views expressed on this podcast are solely those of the podcast guests and may differ from those of RFF experts, its officers or its directors. RFF does not take positions on specific legislative proposals. Resources Radio is produced by Elizabeth Wason with music by me, Daniel Raimi. Join us next week for another episode.