Paul Needley, managing director, Enertek International, makes the case for fast action to support companies in maintaining their R&D departments
The government’s commitment to achieve Net Zero CO2 by 2050 is likely to become more prominent post the Coronavirus lockdown. If the country falls below the projected track towards that target, extra effort (ie extra cost) will be needed in later years to recover lost ground. Covid 19 threatens to lose us ground in the immediate future and without short term action there could be long term consequences.
We are perhaps fortunate in the energy industry that our low-carbon target has widespread public support and organisations like Extinction Rebellion will ensure that the government of the day will be held to account for any slippage in progress towards net zero. However, to achieve net zero we need product innovation and widespread adoption of new technology arising from innovation. History demonstrates that adoption of new technology is ensured if the product is progressive and provides user benefits (either cost savings and/or enhanced features). This applies to all sectors from mobile phones to electric vehicles and heating.
Innovation is therefore the catalyst for adoption of products which give the desired result, in this case the desired result being lower CO2 leading towards net zero. Hence innovation is needed to unlock the potential for progressive change. For innovation in a commercial environment, read Research and Development (R&D).
How to encourage R&D
R&D can be privately driven by individual companies or legislated for via government funding, government backed schemes or universities. The large scale, high profile infrastructure projects should continue to be driven by these initiatives on a national basis, but there is a massive underlying R&D capability in private companies large and small, and in my opinion, much of this activity is under the radar, and under threat.
Whilst the survival of multinationals and large corporations can more or less be guaranteed, in one form or another (someone has to keep the lights on), most product manufacturers need to make a profit to survive – by selling products. Without new products there will be no advancement in technology and little progress towards net zero, so R&D is essential to drive this process.
Unfortunately, upon returning from lockdown, most manufacturing businesses are short of cash after several months of low sales. They need to sell product to raise cash, and they need to manufacture products before they can sell them. They need cash to purchase components and materials, cash to pay for the manufacturing process and cash to administer the sales. The R&D department also needs cash to function, but given immediate priorities for survival, R&D is likely to be last in the queue and may find that there is no cash left!
In a company struggling to recover from the effects of lockdown, thoughts of R&D will lag
Quite apart from the cash situation, in a company struggling to recover from the effects of lockdown, thoughts of R&D will lag behind other considerations. There is no point in developing products for next year and beyond if the company is not likely to survive the next few months. In some cases, R&D costs are being minimised by leaving R&D staff on furlough until circumstances improve, and in other cases, R&D staff are being re-deployed to effect engineering changes rather than innovation. Covid 19 has exposed weaknesses in some supply chains and this is threatening production supplies. Some manufacturers are looking at dual sourcing components to improve continuity of supply, others are seeking suppliers closer to home to get a better control of supplies, whist others are seeking suppliers from the Far East in an attempt to drive down costs. Each of these activities requires design, development, and testing but not research or innovation. Generally speaking, the highflyers in R&D are motivated by research and innovation rather than routine supply chain optimisation, even if the latter is of more immediate benefit to their employers.
Whilst short term redeployment makes good business sense, as a nation we must be aware that stagnation in innovation is dangerous in all but the short term. If R&D programmes are resumed in a few weeks the long term effect of Covid 19 on climate change will be minimal, but if companies decide that having managed without an active R&D department for several months and needing to squeeze their budget that innovation is an unaffordable luxury, many of those furloughed or redeployed engineers (and especially the high flyers) could find themselves unexpectedly on the jobs market and competing with many others in a similar position.
To prevent this occurrence, we need industry leaders (supported by government and the banks) to hold their nerve and invest in innovation to secure their long-term future, and the countries net zero aspirations.
Stagnation in innovation is dangerous in all but the short term
Government clearly has a co-ordinating and influential role to play. It is not my place to lobby government, although it is the objective of the PGES (Parliamentary Group for Energy Studies ) of which I am privileged to be a member, ‘to advise the government of the day on the energy issues of the day’ and during a recent meeting it was agreed that R&D has to be encouraged in all areas of the energy industry if we are to maintain course for net zero.
How to move quickly
There are many ways where the government actively supports R&D including Innovate UK, the Energy Systems Catapult and numerous grant opportunities channelled through the Local Enterprise Partnerships and universities. However, these usually require a lot of administration, verification checks and bureaucracy which often deters all but the most committed businesses. In many cases, success is dependent upon how well the application is completed, rather than the technical merits of the project being proposed.
In my opinion the best and most easily administered funding is the government’s R&D Tax Relief scheme. This is open to all, is non-discriminatory and has well defined rules regarding what qualifies as R&D and what can be claimed. If there is a drawback this is because it is historical – cash has to be spent before it can be reclaimed – but this is normal practice for most grant schemes. However, the R&D Tax Relief scheme has the benefit that year on year funding can be carried forward to contribute towards next year’s R&D, so the retrospective effect is only experienced once. Indeed, this blow can be softened because a company can claim for two years previous R&D investment upon its first application and if it is loss making the company can claim a cash refund.
The current R&D Tax Relief scheme allows a further 130% tax relief (on top of the 100% normal deduction) on qualifying R&D expenditure for SME’s and a tax credit of 13% on qualifying R&D expenditure for large companies. It would seem logical to suggest that these rigid percentages could easily be adapted for different types of R&D project. For example, if the government agree that R&D aligned with CO2 reduction is of more value to society than other forms of R&D, it could legislate that the tax relief uplift for qualifying expenditure can be doubled (or trebled?).
If the government was to adopt this suggestion there would be no additional paperwork for companies to complete (just a different multiplication factor), no more admin for HMRC, and no need for finance administrators to vet any applications or process any checks. HMRC have a perfectly good structure in place for monitoring corporation tax and this would be effortlessly absorbed within it at no extra cost (other than the additional tax relief of course, which would be so valuable to the companies needing it).
This is just one suggestion for ensuring that companies prioritise and can afford to justify R&D investment in our industry. Other suggestions are available, but the underlying need is to help companies invest in long term R&D to ensure we support future generations by protecting the environment and avoiding climate change.
First published in the July 2020 issue of New Power Report