Inflation, high interest rates are threatening energy innovation. Here’s what the US can do

Entrepreneurship can move us away from a climate that is stifling innovation and towards a reliable, affordable, and clean energy future.

Danish offshore wind giant Orsted recently canceled two planned wind farms near New Jersey, requiring it to write off up to $5.6 billion. It's not alone. My research and conversations with energy industry leaders suggest that development of new energy technologies is hitting a wall.

Exploding costs are threatening energy innovation when we need it most. High interest rates that make it tough for companies to access affordable capital are likely to persist. But America can still unleash energy innovation in this economic climate — if government gets out of the way.

Historically, the U.S. has been an innovation powerhouse, ranking at or near the top of global innovation indices. Energy is no exception, and there are currently numerous American companies developing promising new technologies.

NUScale produces small nuclear reactors containing 5 percent of the fuel in traditional 1,000 MWe reactors, while requiring far less land than wind or solar projects. NUScale’s plants can be located on retired coal power plant sites and connect into existing infrastructure.

In California’s Salton Sea, Controlled Thermal Resources (CTR) partners with geothermal plants and extracts lithium from the same hot water used to generate renewable energy. Lithium is essential to the production of electric car batteries, and global supplies are not sufficient for projected demand.

But as they pioneer new technologies, companies like NUScale and CTR face a punishing combination of high costs, high interest rates, red tape and protectionism. When innovation stalls, we compromise our energy goals and miss out on tax revenue that could reduce deficits and thereby help tackle inflation.

To support energy entrepreneurship and maintain America’s position as a global energy leader, we need to align national policies toward the goal of accelerating innovation, largely by getting out of entrepreneurs’ way and letting them do what they do best.

Our first objective should be to remove red tape. The faster companies complete projects, the sooner we reap the energy and tax benefits. Less time between investment and project completion will also lead to more financing because investors favor projects with quicker returns.

We’ve taken some positive initial steps. The Federal Energy Regulatory Commission recently issued a rule that will make it easier for new energy resources to plug into the grid. But the two-year process of enacting this rule — which began in July 2021 and involved nearly 4,000 pages of comments — shows how the federal government is lumbering, not nimble, in the face of an urgent problem.

Additional steps might involve giving regulators more discretion or making it easier for courts to throw out NIMBY lawsuits. As I found in a recent study, states where regulators have their hands tied by politics and NIMBYism are less likely to let entrepreneurs enter energy markets. NUScale has a safe, small nuclear reactor approved by the U.S. Nuclear Regulatory Commission. But unless regulators become more flexible, it will likely struggle to operate in areas where nuclear anxiety remains high.

Our second priority should be to reduce costs through raw materials sourcing and free trade.

Energy companies depend on lithium for batteries, uranium for fuel rods, copper for electrical wiring, and more. Even as ventures like Controlled Thermal Resources find creative ways to procure materials, we need to make it easier for companies to explore traditional mineral and hydrocarbon deposits in the United States, where environmental and labor standards are high.

A copper mining project in Alaska was denied permitting after years in limbo and more than $100 million spent. The project would have generated billions in tax revenue and economic benefits while shoring up U.S. copper supply. Environmental concerns should lead us to institute safeguards, not abandon projects altogether, and must be part of a broad analysis that includes energy security and economic welfare.

For some energy priorities, international collaboration will prove essential. Made-in-America mandates lead to high demand on a few suppliers, raising costs and lowering or even canceling out tax incentives — analogous to hitting the accelerator pedal and the brake at the same time. Protectionism also leads to missed opportunities. Today, only around 5 percent of electric vehicle batteries are recycled, which adds up to a lot of hazardous waste. High labor costs and regulations in the U.S. make recycling difficult here, but investments in trade partners like Mexico and South Korea offer a more promising route.

These suggestions share the same principle: Let the market work its magic. Entrepreneurship can move us away from a climate that is stifling innovation and toward a reliable, affordable and clean energy future. For that to happen, though, we need to support entrepreneurs and eliminate the restrictions that stand in the way of their ingenuity.

Shon Hiatt is the director of the Business of Energy Transition initiative and associate professor at the University of Southern California’s Marshall School of Business.