Saturday, December 31, 2011

Innovation in renewable energy - a lesson from Big Pharma?

McKinsey and KPMG have published reports highlighting the shrinking return on investment from R&D in the pharmaceutical sector. Between 1999 and 2010  R&D in US pharma companies doubled (from 25 bn $ to 50 bn) but the number of market applications did not rise. Since 2007 it is in decline. The NZZ has the following graph to illustrate:



Big Pharma is under pressure from investors to show its worth ("return on research spending", this has nearly halved from 1990 to 2010). Voices are heard which recommend the strategy adopted by car manufacturers of concentrating on marketing and sales, leaving innovation to others.

This could indicate they follow a similar path taken by oil companies BP and Shell who disinvested in renewable energy. Similarly, the investors' pressure to focus on profitable operations (fossil fuels in this case) has played a decisive role. The question is: what could be learned from these developments?
Should renewable energy companies focus on marketing and sales? If I understand the potential strategy of Big Pharma correctly, they would charge a much higher price on their premium brands (which deliver the same effect as the generic alternative). Or the car companies which sell a car that costs 10 times as much as a simple car, yet in terms of functionality also gets you from A to B. Can we imagine a market in which renewable energy is marketed in a similar way?

3 comments:

sien said...

The biggest change in energy in the past 20+ years has come with very little money spent on research - Shale Gas is a huge change.

Research breakthroughs are not often planable.

We already have energy for those who truly believe in catastrophic climate change. In much of the West you can buy green power. Also in many places you can be subsidised to put solar panels on your roof.

The thing is all this is a rounding error in terms of C02 emissions because of the enrichment of the developing world.

But still, some breakthrough could arise. An interesting questions for skeptics would be if switching to low C02 emitting energy sources was very, very cheap ( 0.05% of GDP say ), would they switch?

Of course if the energy breakthrough was in, say, fusion, environmental organisations like Greenpeace and WWF may well object.

eduardo said...

Tyler Cowen has published a recent book 'The great stagnation', in which he argues that all major innovations of the 20th century have been low-hanging fruits, the result of the scientific revolutions of the early 20th century. It would be interesting to know if this happens across all industries and not only in the pharma industry

Reiner Grundmann said...

Eduardo
thanks for the pointer to Cowen. You are probably aware of the critical reviews, eg. here
http://www.economist.com/node/18276872

But no matter if he is right or not: there is a question about how to produce and sell RE.