through a group of independent peers (when the research-awarding process is not captured by rent seekers). One advantage of this approach is that it allows coordination of research efforts with little or no excess duplication. With respect to dissemination, publicly-produced knowledge should generally be made freely available, which is socially desirable to ensure efficient use once produced. A key shortcoming of government-funded R&D is that, as research moves from basic to more applied phases, incentives are not strong to reflect information from markets about what consumers want and are willing to pay for.

As highlighted in Section 1, frontier green (and non-green) innovations that are dependent on significant formal R&D support have to-date largely been concentrated in high-income countries and a few more technologically advanced developing countries, with most developing countries having little such innovations as indicated by patent data. So there is likely a more limited role for formal R&D support for frontier innovations in most developing countries, to the extent that such spending reflects underlying technological capabilities.<sup>20</sup> Box 3 illustrates one such area, the development of smart grids, where major direct government funding for R&D, typically in public-private partnership mode, is taking place in many more technologically-advanced countries, and where the benefits are expected to eventually be reaped by all countries as these technologies diffuse and are absorbed by a broader range of firms.

# **<u>Box 3. Smart grid R&D and expected green benefits</u>**

̳Smart grid‘ means computerizing the electric utility grid, similar to the way today‘s ̳smart phones‘ have a computer inside. It includes adding two-way digital communication technology to all devices associated with the grid to ensure two-way flow of electricity and information between all power plants and consumers and all points in between, with sensors to gather data on incoming power from wind, solar and other renewable that have constantly varying power outputs, broken equipment and leakages, more intelligent management of generation outages, integration of electric vehicles, and power meter usage in homes and offices. R&D activities advance smart grid functionality by developing next-generation technologies and tools in the areas of transmission, distribution, energy storage, power electronics, cyber-security, and the advancement of precise time-synchronized measures of certain parameters of the grid.

A recent study on whether the smart grid is expected to reduce the intensity of green-house gas emissions in the US concluded that it will likely slow the growth in electric power production by reducing consumption over what would have otherwise been consumed without the smart grid, noting that history has shown that new appliances are typically added to homes as they become available, as the population grows, and as incomes and affordability rise. It emphasized benefits of energy conservation by consumers facilitated by demand-response programs and demand-side management, improvements in transmission and distribution systems that optimize power consumption and reduce the need for electric power, as well as the benefits from electricity storage and management, allowing utilities to smooth renewable generation and use base-load generation sources more effectively. - - Source: NETL (2011) and http://energy.gov/oe/technology <u>development/smart grid</u>

> 20 However, even in less developed countries, extending and adapting existing global technologies to local characteristics may justify some investment in basic R&D, including to build technological capacities to define national standards – for instance, solar power technology typically needs to be adjusted to local climate and meteorological conditions, and quality standards for solar panels need to be defined. Public subsidies for basic R&D are subject to the general implementation challenges of focus (which projects to focus on), design (how much subsidy and how best to allocate), and governance structures to mitigate rent-seeking.

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