Demand-Pull for Energy Tech

In “To Boost Energy Innovation, Pull Technologies Into the Market” (Issues, Fall 2024), David M. Hart explores the history and untapped potential of demand-pull policy, one of the US government’s most powerful tools to drive innovation and boost the nation’s manufacturing. While supply-side policies such as grants and loans reduce upfront costs, they do little to secure a market for the resulting products. In contrast, demand-pull policies create a clear signal that customers are ready to purchase a product, encouraging bold investments in breakthrough technologies and American-made products.

Without leveraging demand-pull policy, the United States risks falling further behind as China tightens its grip on vital supply chains for minerals, batteries, and solar manufacturing. China’s use of export restrictions and market manipulation to undercut US projects underscores the urgency to act. Demand-pull policies can create the market certainty needed to attract private investment, catalyzing industries essential to energy security and American leadership.

The immense success of recent federal demand-pull initiatives underscores the potential of this approach. NASA’s Commercial Orbital Transportation Services program, for example, used an innovative contracting process to pay private companies for delivering payloads to the International Space Station, if they could figure out how to do it. This model launched the commercial space industry, solidifying the United States as a global leader in spaceflight innovation, with companies such as SpaceX at the forefront. Similarly, in 2020, President Donald Trump spearheaded innovative demand-side policy by placing an advance market commitment at the heart of Operation Warp Speed, guaranteeing almost $18 billion for the purchase of COVID-19 vaccines before they even existed. This program accelerated pharmaceutical investment in breakthrough vaccine technology and delivered vaccines at record speed, helping to end a pandemic.

Demand-pull policy can also be more effective and efficient than the traditional way of doing things. NASA’s Commercial Orbital Transportation Services program, for example, was designed so that payments were tied to specific milestones and provided only when companies met clearly defined goals. This design incentivized companies to manage projects efficiently, as they bore the bulk of the risk of cost overruns. By paying only for proven progress rather than funding projects in advance with its fingers crossed, NASA minimized its financial risk while still driving breakthrough achievements in the private sector.

The Bipartisan Policy Center is actively educating policymakers on the use of demand-side tools and has proposed innovative policies to drive investment in the hydrogen market and provide American critical mineral processors with greater price stability. This work has generated interest on both sides of the aisle, as demonstrated by the Critical Materials Future Act of 2024. Introduced by Sens. John Hickenlooper (D-CO), Lindsey Graham (R-SC), Chris Coons (D-DE), and Todd Young (R-IN), the legislation establishes a demand-pull program for US critical mineral projects to reduce dependency on Chinese imports.

The incoming Trump administration has the opportunity to build on its past efforts and leverage these tools to accomplish vital US energy innovation, supply chain, and manufacturing goals. If successful, these efforts might just replicate NASA’s success with SpaceX and the commercial space industry, sparking the development of innovative companies and game-changing energy technologies.

John Jacobs

David M. Hart makes the case that government policies that expand markets are a crucial complement to funding research and development for energy innovation. His argument is timely given the change in administration and potential for a reallocation of government support for energy innovation.

The argument for demand-pull policy has a long history, a theoretical underpinning, and a growing empirical basis. One robust finding is that successful innovations combine a technological opportunity with a market opportunity. There is “learning by doing” in which technologies improve as they are used. Moreover, there are feedbacks from adoption of technology that inform directions for research and development, for example by pointing out technical barriers or manufacturing bottlenecks. When supporting basic research, assuming that commercial firms and consumers will pick up a promising technology and run with it is naïve. It ignores the history of successful innovations, including microprocessors, touchscreens, vaccines, and solar panels, all of which included government-led demand. Funding only R&D without paying attention to the markets in which a technology competes squanders those public investments.

The world of energy innovation is far more competitive than in the 1980s or ’90s when the mantra “governments should not pick winners” was at its zenith. US federal energy innovation policy needs to keep up with the times and not cling to ideologies about a limited role for government. Indeed, the world is moving in the opposite direction. Autarchy, or economic self-sufficiency, is increasingly the goal in many realms, especially in energy where national security concerns are intrinsically connected to environmental ones. Advanced market commitments have a strong empirical track record of success. Industrial policy has been on the rise, if for no other reason than to compete with China’s deft use of markets to improve technologies and bring them to scale. Persistent bouts of overcapacity in China are viewed as anathema by the West but are easily absorbed in a few years in the rapidly growing “strategic” markets where China’s policies focus.

Hart is right to focus on implementation issues. Overcapacity is to be avoided, even if the much greater danger is weak market signals that lead to undercapacity. Rent seeking, when companies use influence to skew government decisions to their benefit, is to be expected, and guard rails set against it. Just as in the US government’s Operation Warp Speed for COVID-19 vaccines, there are winners to pick, promising technological directions to support. Risk aversion in the federal bureaucracy is clearly a concern and needs an approach where portfolios of projects are assessed for evaluation, not singular projects. Learning, generating new knowledge, and dispersing that knowledge are crucial goals.

We have had this debate before. In the 1980 presidential election campaign, the winning candidate, Ronald Reagan, emphasized a technology push-light approach. That ended demand-pull policy for the emerging solar industry. Globally, that set back the industry for 10–20 years. For the United States, it spelled the end of its leadership on solar, relinquishing it to Japan, Germany, and then China. Hart provides a timely reminder that the United States cannot afford to squander its national investments in innovation in that way again.

Gregory Nemet