BUS604: Innovation and Sustainability

At technical universities we make use of the learning curve, or cumulative learning, which is used in all industries. The economics of a learning or experience curve are reflected in a lowering of cost for successive generations as technology improves and production increases in scale. The learning curve of 'Henderson's Law' found an average of 15 per cent cost reduction for every doubling of output. This is an empirical law based on averaged findings without a firm theoretical basis. It was found useful for developing cost projections in a variety of industries, including cars, aviation, televisions, and high technology. Both the economies of scale and the innovations of new generations factor into cumulative production output to enable an average learning curve of 15 per cent cost reduction per cycle.

Instead of misguided innovation policies promoted by central government, van der Veer points to the dynamics of the learning curve as instructive for the development of the renewable energy industry, especially offshore wind farms, which are currently not market-viable.

"With this kind of technology, it is reasonable to estimate that if you build the first generation, then the second generation probably already has a lower cost of 15 per cent. And then the third generation is 15 per cent lower than that figure, and so on. A learning curve for 15 per cent is not unreasonable". In this iterative process, four such cycles, leading to a fifth generation, could halve the price per unit of electricity.

Rather than blow an entire budget on merely subsidizing the manufacture of an expensive first generation, a smarter innovation policy focuses on research and development according to the learning curve, bringing industry on board for new public-private partnerships. This way offshore wind energy could be developed into a genuinely market-viable industry, rather than a way of meeting regional targets in a wasteful manner.

"So you have to build not too many expensive wind turbines, but you have to build a few. You do a lot of development and research and you put a target there: the price per unit of electricity should be much cheaper.

"Now if you do that seven times, and if one cycle takes two years - that is pretty fast, by the way - then in 14 years offshore wind may be roughly commercial. That is very important, because if it is commercial it doesn't need subsidies. And the industry wants to build it, because you can make money on it.

"To fund that or to contribute to that kind of research with public-private partnerships with the government will cost much less money than the large sums of money that the Netherlands is currently putting into it. So they have a wrong model. I can't be more straightforward. They are really on the wrong track.

"Now if you explain that to the minister, as I did at the time to the Minister of Economic Affairs, you'll see that they are not deaf. So why did they pursue the policies that they did? It's quite interesting. They will say, we have agreed targets in Europe: by 2020 we have to have so much renewable energy and we are a country which, if we agree something, likes to adhere to that. And within all the alternatives we have, while this may be waste in your view, it is the lowest waste. Now you may have an intellectual debate on whether that was the best choice, but I think they should have turned back.

"The planet will not be saved by having 20 per cent renewable energy in Europe in 2020. You can help the world in a much better way, but maybe some years later by applying more commercial technology. Then you can discuss how many years later, when you have unsubsidized commercial forms of renewable energy. That is what the debate should be. But there was simply not enough momentum in Europe to go back to Brussels to adjust the 2020 targets".

"So, you have first to achieve a lower cost per unit of electricity before you build a lot of wind farms. Development targets should be based on the cost per kilowatt-hour without subsidy. That is what should have happened. And, by the way, this applies to other renewables as well, not only offshore wind".

Is the Dutch wind farm policy an example of politics without vision that is focused on the short term and leads simply to the wrong decision?

"Yes, exactly. By imposing too strict targets too early, you get sub-optimisation, because you do the wrong things".

Do subsidies slow down innovation?

"I think in general if you subsidize research in early development, especially if you do it in public-private partnerships, it can be a good thing. Take those wind farms. Before you say that offshore wind is too expensive, look around to see how it can be done cheaper. You go to Boskalis and Van Oord, who will say, we are dredgers and work on the normal tariff, but if the order is big enough, we can build special ships. Then you can go to Heerema for construction, and so on. All these industrial players like to make money, but no one wants to invest in research and development. Now they have their eyes on a huge pile of short-term government money. That is the wrong approach.

"What you could have done together with the top industrial sector is to form a new public-private partnership, to go through the first three or four cycles in the learning curve. My estimate at the time was that the cost to make wind energy commercially viable is about €800 million, and we could create a fund. We invest €400 million in stages, subject to achievements, and leave €400 million in a fund. Then you form a consortium with Boskalis and Van Oord. with Heerema and other firms, who fund the other €400 million to match the investment by the government. And you can use that money especially for the early phases of the research and development, of going through those learning curves".

As we saw in our case study on the cyber domain, the early stages of the development of the technology happened entirely inside the US government, and it was a political decision by President George H. W. Bush to bring it to the market. In this case, Jeroen van der Veer and former Defense Minister Hans Hillen agree that the investment should come from both parties, with both government and industry sharing responsibility. When the development process succeeds, then industry can take over.

"Or to put it more directly: in the first round, the government funds the wind farms to the tune of about 65 per cent. But in the second round, we go down the learning curve, and the government pays 58 per cent. In the third round we are already below 50 per cent, and so on. For the industry this can be quite attractive, and for the government results can be achieved at a relatively low cost.