Research and Development

Research and development refers to a deliberate investment of effort, whether by a government or a private organization, to develop new technology and bring it to commercial production. R&D activities can range from basic research to commercializing a product to improving a product that has already been commercialized.

R&D Priorities

We recommend that public agencies, such as the U. S. Department of Energy, undertake research and development as follows. Details are in our assessments of individual energy production technologies.

Expected costs and benefits for electricity R&D, in billions of dollars.

See the individual production analyses (solar, wind, nuclear, fusion, and ocean power) for information on potential cost and market share, and our Environmental Impacts of Energy analysis for information about GHG and non-GHG impacts.

For R&D time, we assume 5 years for technologies that are commercially deployed today but not at full potential, 10 years for those near but not at commercialization, 25 years for those not near commercialization, and 40 years for fusion and space-based solar.

For R&D cost, we assume $460 million per year for nuclear technologies, based on an analysis of advanced reactors ¹; $830 million per year for renewables, based on a wave energy analysis ²; and $65 billion total for fusion and space-based solar, based on an analysis of ITER ³.

A 7% discount rate is used throughout.

Our model for the effectiveness of public R&D is as follows. We model that, after the R&D period, an electricity source gains 2% of its potential market share every year for 50 years. The market share is based on what a mature form of the technology could undercut by the levelized cost of electricity. The financial benefits of displacing more expensive electricity, greenhouse gas reduction (valued at $50/ton), and non-greenhouse gas external costs and benefits of electricity are assessed.

Current production is assessed at 2022 levels from the Energy Institute Statistical Review of World Energy ⁴, except production of Geothermal power is taken from the International Renewable Energy Agency (2021 value) ⁵. The levelized cost of other forms of electricity are derived from the U.S. Energy Information Administration ⁶, and lifecycle greenhouse gases for existing power plants is taken from Roser ⁷. For non-greenhouse gas external costs of power, see our discussions of other energy sources.

Our model incorporates an overall rise in electricity demand, as forecast by Enerdata ⁸, and a decrease of carbon-intensity of electricity, as also forecast by Enerdata ⁹. We assume a 11% chance of an R&D program being successful, based on experience in the pharmaceutical industry ¹⁰.

Current Investment

Investment in new technologies, as well as research and development in particular, are necessary to bring new energy technologies to commercial production, which in turn are necessary for a complete transition away from fossil fuels. Worldwide, corporations invest in energy as follows.

Worldwide private sector energy investment in 2019. Figures are dominated by capital expenditures rather than research and development. Source: International Energy Agency ¹¹.

Researchers from McKinsey & Company ¹² have found that as of 2019, the energy industry invested 3% of its pretax earnings on research and development, a lower rate than most industries. Businesses in OECD countries account for over two-thirds of total R&D spending, a portion that has been increasing since the 1990s ¹³.

There is social benefit to research and development; when one company develops a new product, it does not capture all the benefits as the product spreads to other companies. Thus, even in the presence of an economy-wide carbon price, there is justification for governments to invest in R&D ¹⁴. Current public investment is as follows.

Data on public energy R&D expenditures in 2023 from International Energy Agency member countries. IEA member countries comprise approximately three quarters of world total energy spending. Figures include direct spending and subsidies for private R&D. Source: IEA ¹⁵.

Value of R&D

Despite the evident value of research and development, precisely measuring that value is quite difficult ¹⁶. However, some evidence suggests that R&D carries a large social benefit.

The scenarios portrayed above represent different assumptions of the value of R&D and the cost. Source: Jones and Summers ¹⁷ and Jones and Williams ¹⁸. See also Matt Clancy's exposition of the work ¹⁹.

Mansfield ²⁰ also finds evidence of high rates of return for R&D investment in industry, agriculture, and for medical devices. Evidence from small business grants ²¹ also suggest that these are highly cost-effective research and development tools. R&D carries significant spillover effects, in that when R&D is funded in one field, it can advance progress in another ²².

Crowding Out

Despite the apparent benefits of public research investment, there is a risk of crowding out, or public investment detracting from what the private sector would spend on research and development. With this consideration, the societal benefit of public R&D expenditure may be less than it initially appears. Marino et al. ²³ find among French firms from 1993 to 2009, public investment in research, including the R&D tax credit, crowded out private investment. Earlier, Aushauer ²⁴ found that the crowding out effect was widespread, not confined merely to R&D expense, though in some cases public spending can complement private spending.

Damrich, Kealey, and Ricketts ²⁵ find both evidence of crowding out from public R&D investment and crowding in: the tendency for public investment to spur additional private investment.