This paper presents a process model of innovation, wherein layers of the innovation system – information exchanges, activities, and technology – interact to produce innovation. Firms, government, academia and non-governmental organizations all play a part in this system, by using and producing information, by conducting and funding activities, and by using and monitoring the state of technology. Since rapid energy innovation is key to addressing daunting energy-related challenges, it has been a priority for government. Given the pressure on federal funding, it is important to consider how the public sector can leverage its position in the system to have the greatest impact from its investments.

A given technology moves along a continuum from idea to technology in use to obsolescence. As it progresses, different types of activities are most appropriate for moving the technology along. There is an important break when technology becomes commercialized, at which point it is not so much developing as improving. Progress is rarely steady – technology in development often needs to revisit an earlier stage to solve issues as they are discovered. Many ideas do not work out and are discarded. Some ideas are used in multiple applications, but all technological advances incorporate many ideas including prior technology.

Information moves through exchanges, and affects how activities advance technology, as well as how actors decide to engage in activities. Scientific knowledge, media, and markets are all information exchanges. Innovative activities not only move technology along at the corresponding stage, but add to the pool of knowledge and generate new ideas. Actors interact with each other but also connect the different layers. Firms search for, react to, and use information from the exchanges, and in turn produce and transmit information. Based on this, they engage in or support activities, which affect the pace and state of technologies. They monitor their technologies, which forms a feedback loop with their decisions about engaging in activities. They also apply technologies for their own use.

Some government agencies act like firms in this way, engaging in activities in response to information and the state of technology. Others fund activities conducted by others, exercising varying degrees of control over which activities are applied. Many government policies are primarily about information – including standards, regulation, demonstration, disclosure requirements and voluntary programs. However all policies, from funding opportunities to tax incentives, act as signals to encourage certain activities.

In the Department of Energy, funding mechanisms specialize along activities and technology stages. Traditionally, there have been grants for university-conducted basic research and National Laboratories and Cooperative Agreements for applied research. New mechanisms include ARPA-E, for high-risk research along the entire development process, and Innovation Hubs, to bridge the research-to-development gap. Still missing is a mechanism for supporting large projects near the commercialization stage. Because of its fragmentation, the information and signaling aspect of energy policy is often contradictory, reducing the effectiveness of government at inducing private activity.