In an ever changing world, technological innovation allows us to adapt, survive and thrive. Innovation can impact us adversely as well – the steam engine brought the industrial revolution and with it economic growth and prosperity as well as environmental pollution and inequality. In order to reap innovation’s full benefits, we should try and understand how it works.
The energy sector is an exemplary case study in the attempts to better understand innovation for several key reasons. It is the backbone of the economy and under major pressure because of pollution concerns, it is resistant to change because of large investments and huge interdependencies, and there is an amazing variety of technologies that keep the system running.
A common understanding of technological innovation in such a system includes a pervasive idea of niche markets. The question for this article: do niche markets really matter?
The dominant concept on how innovation occurs can be summarized as follows:
A sector or industry like electric power is ruled by large incumbents with vested interest in current practices.
Because of its dominance, inertia and coherence it is called a regime.
The regime is very much developed in terms of size, organisation and technological performance. It sets clear and strict performance requirements for technologies concerning price and performance.
It is believed that new technologies are developed outside of the regime in protected market spaces called niches. Niches are populated by entrepreneurs and researchers. They are small in size and their performance requirements for technologies are different from the regime.
For example, a niche may value environmental performance much more than the regime does. Upon maturation, the novel technologies are expected to find their way from niche markets and into a regime.
Historically, the power sector has been classified as being served by several niche markets. Often-mentioned examples include aerospace and terrestrial off-grid applications. These niches are used to explain significant innovation gains (e.g. the space program’s key role in the development of solar photovoltaic technology). However, this heavy emphasis on niche markets prevents more thorough understanding of the innovation process.
A good reason to not readily embrace niche theory is that many technologies only received a small amount of benefit from niche markets. For example, modern wind turbines were used in the off-grid niche markets in rural areas in the United States for decades for moving water. But, it was an oil crisis and increased knowledge of aerodynamics during World War II that enabled wind to enter the electricity sector at a significant level. Similarly, solar PV was born in the aerospace market, but its real development started only after it entered the electricity sector.
Given these apparent contradictions, one naturally asks – how can innovation develop outside a niche?
Supporting technologies, price, and performance
The most relevant condition for technology development is the existence ofsupporting technologies. Infrastructures like roads, the power grid and railways support technologies because they multiply the utility of cars, power plants and trains. Other supporting technologies include operating systems that support software packages, cars that support engines and smart phones that support camera technology.
The important concept is that combining technologies with their supporting counterparts exponentially multiplies their usefulness. A single power plant for example, has some value, but can be deployed much more effectively when connected to the large electricity grid. Similarly, software becomes truly valuable to users when it is supported by a widely used operating system. As a result, the performance of novel technologies is only comparable with conventional alternatives when all are connected to similar supporting technologies.
Niche markets exist because of special applications and generally value energy performance over price. However, for mainstream energy technology markets, the ratio of price and energy performance is more important. Increases in energy output per unit are less relevant than decreases in price per unit. As a result, prices go down when novel technologies become connected with their supporting counterparts in the regime.
Solar cells are a great example of this concept. At first, they did not have much value in the electricity sector because they were much too expensive per unit. However, in the thirty years after Jimmy Carter and many others starting putting solar panels on their roofs, the cost per Watt for solar PV decreased by a factor of 9. Over the same time period, the energy efficiency of different cell designs tested in R&D environments increased only by a factor of 2. The regime thus played a more important role for solar energy development than the niche.
Naturally, new technologies have a hard time to compete with fully developed conventional technologies. The connection of supporting technologies therefore needs to be complemented with protective regulation. Policies like the feed-in-tariff initially protected renewable technologies from fierce price-based competition. While needing such protection, solar photovoltaic technology benefitted from available investment capital, business interest and learning by doing.
The electric car
Another example of a technology that discourages from placing much importance on niche markets is the electric car. Quite significantly, the electric car outsold gasoline and diesel models in the early days of the automobile. Even though electric cars had no clear niche applications, they have regularly popped up in automobile history, most strongly with global oil crises and more recently because of increasing concerns regarding global climate change.
The absence of significant niche markets for electric cars is explained by the fact that replacing a combustion engine with an electric motor is relatively easy. Electric engines were already developed in other sectors like rail and manufacturing. Those sectors are clearly not niche markets. The most significant challenge for the electric vehicle is the development of better batteries. This need is currently being addressed not in a niche market but in the automobile sector itself.
So, what can we conclude from this discussion?
While niche markets often exist if one looks for them, they do not explain innovation as well as one may want them to. In order to understand innovation, it is necessary to regard protection from market competition and the role of supporting technologies as the leading phenomena that make innovation happen. The combination of both can be found in regimes – and it is here that innovation truly gains speed.
Originally posted as a guest post at Scientific American at the invitation of Melissa C. Lott.
Photo credit: Photo of solar array at Nellis Air Force Base by US Air Force – taken by Airman 1st Class Nadine Y. Barclay – and found using Creative Commons.