Research and development funding

R&D efforts try to improve energy efficiency by ensuring that energy-efficient and low greenhouse gas emitting technologies will be available in the future.
R&D funding can be a key driver of innovative ideas, can assist the accelerated market introduction, and reduce the incremental costs of energy efficient solutions.

Worldwide implementation status
Most countries have some sort of R&D funding but the procedure, the financing and the organisation of the R&D efforts and the funding schemes are diverse. While many countries fund research on energy efficiency, much fewer countries probably fund R&D projects on raising appliance energy efficiency.

Governance level
In most cases research and development funding schemes were introduced at national level. In some cases, research and development funding was realised in a group of several countries (e.g. the European Union includes 27 countries).

Research and development funding on energy efficiency in appliances can be realised with a residential, industrial, commercial or public sector focus. It depends on the focus of the R&D programme. In principle the sectoral focus is unlimited.

Related sectors

• services
• residential
• industrial

In recent years energy efficiency and the technological development of appliances are getting more attention. In this context the identification of the best domestically available technologies is the start, and the development and demonstration of best not yet available technologies and their potentials are the main research fields. R&D funding aims to improve the energy efficiency of appliances through technology development and realising the innovation potential.

Related target groups

• Manufacturer
• Research institution and university

Direct beneficiaries

• Manufacturer

  They have the chance to increase their research activities by getting financial incentives and support.

• Research institution and university

  They have the chance to increase their research activities by getting financial incentives and support.

Indirect beneficiaries

• User

  End-users indirectly benefit after the commercialisation of new developed products. They have the chance to buy a high-quality product and to save money.

Relevant barriers

• Technical barriers: Options may not yet be available, or actors may consider options not sufficiently proven to apply them.
• Knowledge and information barriers: Actors may not be informed about possibilities for energy efficiency improvement. R&D can lead to identifying new leapfrogging technological solutions to energy efficiency. However, there is also uncertainty for manufacturers whether there will be a market for energy-efficient appliances and thus a risk to invest in their research and development. R&D funding will reduce this risk.
• Lack of interest and motivation in energy efficiency-improvement: The private sector tends to focus its R&D investments on short-term changes for obtaining a quick financial return. This may result in not sacrificing environmental and energy-efficient criteria. Governments therefore have to intervene in order to support energy efficiency R&D activities (OECD, 2004; Jefferson, 2000). New technologies realised through R&D funding can help raise the productivity and competitiveness of companies and create employment by producing new products as well as improving production process. (IEA 2007).

Relevant incentives

• Improved reputation: New products and processes developed through R&D can create a significant competitive advantage (early leadership) for the company and signal the interest in broad policy goals.
• Contribution to protection of the environment: Research and development (R&D) is critical to drive the development of innovative technologies to contribute to mid-term and longer-term policy goals.

As funding for energy efficiency R&D is an instrument to achieve policy targets, a clear link to other relevant policies should be established to maximise the impact and efficiency of the R&D activities (IEA 2007). Therefore, R&D efforts can and should be part of an effective policy package. Market breakthrough of very energy-efficient appliances with new technologies is often hindered by a plethora of market barriers and thus likely to need further policy support.
Concrete policy instruments that should be integrated into an effective policy package are energy labels, minimum energy performance standards (MEPS) and, where appropriate, financial incentives. To be effective it is essential to establish R&D in accordance with these instruments. Once a certain market share of highly energy efficient appliances above a specific performance level is reached, MEPS can secure this level and the requirements for getting into the next market stage should be prepared by R&D activities.

Pre-conditions for R&D funding programmes are an agency or project authority and a funding scheme.

Agencies or other actors responsible for implementation
A public authority should be responsible for the assessment of R&D proposals, their approval and for funding the research activities. It should also guarantee the financial issues and the monitoring/evaluation of the policy.

Funding
Government agencies can provide both financial and non-financial incentives to support R&D for energy-efficiency. Different types of interventions are:

• The government can directly finance R&D efforts in universities, research institutes, science parks etc.
• The government can directly fund R&D efforts through providing financial grants also to manufacturers or mixed public-private consortia. 
• Tax incentives can indirectly support private R&D activities by providing tax relief that lowers costs. 
• The government can install a fund for venture capital and to support inventions that overcome the so called “valley of death” e.g. the gap between public funding for invention and private commercialisation.

Test procedures
Testing the energy efficiency of newly developed very energy-efficient appliances in comparison with the existing appliance models needs test procedures. Development of test procedures also needs funding and often involves R&D, e.g. for analysing reproducibility of test results with ‘round robin’ tests performed by several test laboratories on the same appliance.

The existence of a national energy roadmap is the most important precondition for a long-term target-oriented R&D strategy (IEA 2007). Next, a well-designed R&D strategy with a portfolio of R&D programmes to support energy efficiency follows. Moreover, transparency and the involvement of stakeholders in defining an R&D strategy is important (IEA 2007).
A main step is the prioritisation of different research targets and concepts. Limited resources and a multitude of opportunities requires careful attention to funding priorities harvesting comparative advantages of the specific national frame conditions and resources. The programmes should demonstrate relevance and consistency with national priorities. Innovative ideas that show promise should then be selected and funded. A monitoring of the programmes is essential to follow the development of the research activities. (IEA 2007).
Actors responsible for implementing the research and development activities can be governmental departments, universities, research institutes, private companies, and non-governmental research bodies.

Quantified target
The policy can and should have a quantified target. The effectiveness can be evaluated through the degree to which the energy consumption of the appliances subject to R&D has been reduced by it and if they are commercialised, by the market development of the very efficient appliances (number of units developed and sold).

Co-operation of countries
Enormous R&D investments are needed to address the significant global energy challenges, while maintaining economic growth. This calls for international collaboration on R&D.
Co-operation of countries has numerous advantages. Countries co-operate with other countries in order to “share costs, spread risks, avoid duplication, access facilities, enhance domestic capabilities, support specific economic and political objectives, harmonize standards, accelerate market learning and create goodwill” (IPCC 2007).
International collaborations can learn from an already established knowledge base and can make use of specialised expertise. Co-operations are especially helpful for countries with less experience. They have the chance to learn from other countries. In addition countries can co-operate and establish comprehensive funding schemes.

Monitoring and evaluation of R&D activities are essential to guarantee the success of each programme. Programmes must demonstrate importance, consistency with national priorities, and success (IEA 2007). More specific indicators of success can be whether the expected energy efficiency improvement has been achieved in an R&D project, whether the results are reproducible by others, and whether the very energy-efficient appliances have been successfully commercialised.
Methods for evaluation are diverse and include self-evaluation as well as evaluations by external experts. Most evaluations use statistical data and interviews with stakeholders to evaluate the success of the programme and to develop recommendations for future activities (IEA 2007).

Relevant individual dynamics and side-effects

• Dynamic market transformation and/or innovation: R&D funding will stimulate innovation towards improved energy efficiency of appliances. This is a precondition for starting their production and sale, and thus making markets and policy dynamic towards higher levels of energy efficiency, However, if not enough policy support, including financial incentive schemes where needed, is provided for a fast market transformation, manufacturers cannot recover their R&D investments timely enough to invest in still more energy-efficient products (CECED, 2006).
• Avoiding lost opportunities: By developing and promoting energy efficient technologies, R&D funding tries to induce manufacturers to develop more energy-efficient appliances and consumers to buy these appliances instead of other, less-efficient ones (the production and purchase of the inefficient appliances would be a lost opportunity for saving energy).
• Minimising rebound effects: To minimise rebound effects (e.g. consumers buying larger appliances or using them more intensively, as they feel these are energy-efficient) it is essential to accompany the commercialisation of the energy-efficient appliances with consumer-oriented instruments on their efficient use and with requirements to reduce rebound effects, e.g. through limits on the absolute energy consumption allowed.
• Minimising snap-back effects: To avoid snap-back effects, R&D funding schemes should be accompanied by a policy package to enable market mainstreaming of the energy-efficient appliances being developed.
• Minimising free-rider effects: Manufacturers or research institutes may receive R&D grants for projects that were planned anyway. This would be a free-rider effect. It is difficult to avoid but may be reduced by including independent experts in the evaluation of research proposals and by requiring a minimum percentage of energy efficiency improvement from the R&D projects.
• Creating Spill-over effects: If the energy-efficient appliances developed with the support of public R&D funding are commercialised, this will create spill-over effects. In fact, this is the theory of the main impact of R&D funding. Watanabe (1999) argues that government R&D can play a role in achieving breakthroughs in some areas and also generates trans-sectoral spill over effects (Cited from IPCC 2007).

Sustainability aspects
Public R&D funding mechanisms can include sustainability criteria as a condition to receive the funding. These aspects can be water consumption, noise, waste reduction or general resource efficiency and other performance characteristics.

The following barriers are possible during the implementation of the policy:
Barriers for implementation are the risk of high initial costs. Furthermore difficulties in prioritisation are possible. The combination of limited resources and a multitude of opportunities requires careful attention to funding priorities (IEA 2007).

The following measures can be undertaken to overcome the barriers:
Scoping studies can assess the state of technology and the potential for improving energy efficiency of different types of appliances. Priorities can be set based on such studies,. An example is the MaxTech study performed by the Lawrence Berkeley National Laboratory.

The achievable energy savings depend on the technology and the innovation potential. Therefore it is difficult to make general statements about achievable energy savings.
The effectiveness depends on consistent funding, (when technologies are developed), and the commercialisation of these energy-efficient products. R&D may have high benefits in the long term (IPCC 2007).

The relevance of R&D funding in some countries is already high. For example increasing investment in R&D is one of the five priorities of the Europe 2020 strategy. EU R&D intensity has grown from 1.85% of GDP in 2007 to 2.01% in 2009 (European Commission 2011). A growing share of R&D activities is carried out but not only in the EU. Examples from other countries are the USA with 2.01%, South Korea with 2.45%, and Japan with 2.68% of GDP. “In a historic context, R&D expenditures as a percentage of GDP have gone up and down in cycles as government priorities have changed over the last 50 years” (IPCC 2007).
For an overview about publicly funded energy research and development expenditure by International Energy Agency member countries see the next figures. As the shows, energy efficiency R&D is only a minor part of this expenditure, fluctuating around US$ 1 billion a year, and R&D funding for energy efficiency in appliances is likely to be only a very small part of overall energy efficiency R&D expenditure.

The cost-effectiveness of R&D funding schemes will depend on the design of the programme and the degree of risk (IPCC 2007). In the energy sector, several appliances have long lifetimes. Therefore it can take years to commercialize the newly developed energy efficient appliances. This makes the public role for R&D even more critical (Margolis & Kammen 1999).