1
Introduction

The oil embargo by the Organization of Arab Petroleum Exporting Countries nearly 30 years ago stimulated the United States to search for new technology solutions to its energy problems. Indeed, the first government reports to recommend an energy research and development (R&D) agenda appeared within weeks of that 1973 event. In 1975, President Ford created the Energy Research and Development Administration (ERDA), consolidating under one umbrella existing R&D energy programs from several agencies. In late 1977, ERDA became part of the new Department of Energy (DOE). And today, energy R&D remains a major element of DOE’s mission.

From 1978 through 1999, the federal government budgeted $91.5 billion (2000 dollars) in energy R&D, mostly through DOE programs (NSF, 2000). This direct federal investment constituted about a third of the nation’s total expenditure on energy R&D, the balance having been spent by the private sector. Since government policies—from cost sharing to environmental regulation to tax incentives—influenced the priorities of a significant fraction of the private investment, it can be said that, on balance, the government has been the largest single source and stimulus of energy R&D funding for more than 20 years.

From its inception, DOE’s energy R&D program has been the subject of many outside evaluations. This project once again addresses the question of whether the benefits of the program justify the considerable expenditure of public funds since 1978. Unlike the authors of earlier studies, however, this committee aimed to evaluate comprehensively the actual outcomes of DOE’s research over two decades. This chapter outlines the background of the study and the committee’s charge and approach to it.

A BRIEF HISTORY OF FEDERAL ENERGY R&D

From 1978 on, debate about how best to spend the public’s money surrounded DOE’s research program. As differing views gained ascendancy in this ongoing debate, the program has had to adapt to sharp swings in goals, priorities, and management philosophy. A brief review of these changes is essential to setting the stage for a review of the program itself.

Perhaps the most important change in the debate has been the evolving understanding of the larger goals of energy policy, and hence of R&D objectives. The earliest response to the first Arab oil embargo was the Nixon administration’s Project Independence, which took as its purpose making the United States independent of foreign energy sources. Although this goal quickly proved impractical, reducing dependence on energy imports (especially oil) persisted as a central tenet of energy policy into the 1980s. Well into the 1980s, government R&D policy stressed the development of alternative liquid fuels. To accelerate this outcome, the government engaged in large and expensive demonstration projects to stimulate the production of liquid fuels from domestic resources such as oil shale and coal. The sense of urgency behind this policy of producing homegrown fuels culminated in the establishment of the Synthetic Fuels Corporation (SFC) in 1980.

In the next year, the incoming Reagan administration radically changed the direction of national energy policy. More faith was placed in market forces to resolve energy supply and demand imbalances and in the development of technologies to enlarge the former and constrain the latter. In consequence, federal research goals began to stress long-term, precompetitive R&D. Large demonstration programs virtually disappeared from the scene, the SFC quickly expired, and the administration proposed drastic cuts in the federal energy R&D budget. Although the Congress did not approve the deepest funding reductions, most of the 1980s became a time of major retrenchment for DOE’s research program.

Throughout this entire period, from the mid-1970s through the 1980s, the balance of federal funding between supply and conservation research was a matter of continuing controversy. The issue had been joined as early as 1975, when ERDA’s first R&D plan was criticized for giving short



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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 1 Introduction The oil embargo by the Organization of Arab Petroleum Exporting Countries nearly 30 years ago stimulated the United States to search for new technology solutions to its energy problems. Indeed, the first government reports to recommend an energy research and development (R&D) agenda appeared within weeks of that 1973 event. In 1975, President Ford created the Energy Research and Development Administration (ERDA), consolidating under one umbrella existing R&D energy programs from several agencies. In late 1977, ERDA became part of the new Department of Energy (DOE). And today, energy R&D remains a major element of DOE’s mission. From 1978 through 1999, the federal government budgeted $91.5 billion (2000 dollars) in energy R&D, mostly through DOE programs (NSF, 2000). This direct federal investment constituted about a third of the nation’s total expenditure on energy R&D, the balance having been spent by the private sector. Since government policies—from cost sharing to environmental regulation to tax incentives—influenced the priorities of a significant fraction of the private investment, it can be said that, on balance, the government has been the largest single source and stimulus of energy R&D funding for more than 20 years. From its inception, DOE’s energy R&D program has been the subject of many outside evaluations. This project once again addresses the question of whether the benefits of the program justify the considerable expenditure of public funds since 1978. Unlike the authors of earlier studies, however, this committee aimed to evaluate comprehensively the actual outcomes of DOE’s research over two decades. This chapter outlines the background of the study and the committee’s charge and approach to it. A BRIEF HISTORY OF FEDERAL ENERGY R&D From 1978 on, debate about how best to spend the public’s money surrounded DOE’s research program. As differing views gained ascendancy in this ongoing debate, the program has had to adapt to sharp swings in goals, priorities, and management philosophy. A brief review of these changes is essential to setting the stage for a review of the program itself. Perhaps the most important change in the debate has been the evolving understanding of the larger goals of energy policy, and hence of R&D objectives. The earliest response to the first Arab oil embargo was the Nixon administration’s Project Independence, which took as its purpose making the United States independent of foreign energy sources. Although this goal quickly proved impractical, reducing dependence on energy imports (especially oil) persisted as a central tenet of energy policy into the 1980s. Well into the 1980s, government R&D policy stressed the development of alternative liquid fuels. To accelerate this outcome, the government engaged in large and expensive demonstration projects to stimulate the production of liquid fuels from domestic resources such as oil shale and coal. The sense of urgency behind this policy of producing homegrown fuels culminated in the establishment of the Synthetic Fuels Corporation (SFC) in 1980. In the next year, the incoming Reagan administration radically changed the direction of national energy policy. More faith was placed in market forces to resolve energy supply and demand imbalances and in the development of technologies to enlarge the former and constrain the latter. In consequence, federal research goals began to stress long-term, precompetitive R&D. Large demonstration programs virtually disappeared from the scene, the SFC quickly expired, and the administration proposed drastic cuts in the federal energy R&D budget. Although the Congress did not approve the deepest funding reductions, most of the 1980s became a time of major retrenchment for DOE’s research program. Throughout this entire period, from the mid-1970s through the 1980s, the balance of federal funding between supply and conservation research was a matter of continuing controversy. The issue had been joined as early as 1975, when ERDA’s first R&D plan was criticized for giving short

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 shrift to conservation. The Carter administration made conservation a centerpiece of its energy policy, and much was made of the “market failures” that prevented the private sector from adopting cost-effective (and readily available) energy conservation technologies. The Reagan administration took a different view, and cuts in the conservation budgets were among the most severe of the cuts that it proposed. In the late 1980s, the nation’s understanding of the energy problem and of the goals of energy policy matured. By 1985, the combined effect of more efficient energy use and important new finds of oil and gas had loosened the hold of the Organization of Petroleum Exporting Countries (OPEC) on oil prices and greatly leavened the pessimism of the resource depletion school of energy policy. Concern for energy dependence (measured by the level of oil imports) gave way to the notion of vulnerability (calculated as the fraction of oil used in the economy whether imported or not) as the chief metric of security against possible disruptions in international oil markets. Environmental concerns gained even greater prominence as a driver of energy policy, particularly the need to moderate emissions from the nation’s most widely used domestic energy resource—coal. The emergence in the 1990s of global climate change as a serious environmental issue deepened concerns over the burning of coal, and indeed of all fossil fuels. Early views of energy conservation changed to become a strategy of deploying energy efficiency technologies as an economically attractive solution to energy and environment problems. During this time, DOE first began to appreciate and address the health impacts of indoor air quality associated with the inappropriate use of more efficient technology with the potential to cause adverse health effects when buildings become essentially sealed environments. Arguably, the late 1980s and early 1990s saw energy policy and its associated research objectives reach a more stable level. Even so, adapting to these shifts created another round of profound change in the direction and management of DOE’s R&D program. Early in the period, the Clean Coal Technology program invested heavily in technologies for burning coal in a more environmentally friendly way. After 1992, technology priorities moved in the direction of renewable energy sources and energy efficiency, newly interesting because of their low or zero net contribution to greenhouse gas emissions, thus offsetting fossil energy-based emissions and slowing the buildup of atmospheric greenhouse gases and resulting climate change. Toward the end of the period, energy R&D planning began to take a portfolio approach, recognizing both that energy policy must serve multiple goals and that research produces failures as well as successes. And the role of federal funding, having swung between support of expensive demonstration projects and limited funding of basic research, settled into a preference for cost sharing in the form of public-private partnerships. This brief recounting of the shifting forces that shaped energy R&D over the last 25 years leaves out many important details, of course. But even the highlights convey a sense of the twists and turns of both the program goals and the management philosophy that DOE’s research managers have had to follow since 1978. Without an appreciation of these shifts, evaluating the successes and failures of DOE’s research program would be a very frustrating and puzzling enterprise. ORIGIN AND SCOPE OF THIS STUDY In legislation appropriating funds for DOE’s fiscal year (FY) 2000 energy R&D budget, the U.S. House Appropriations Subcommittee on the Interior directed an evaluation of the benefits that have accrued to the nation from the research and development programs that have been conducted since 1978 in DOE’s Office of Energy Efficiency and Renewable Energy and its Office of Fossil Energy. The congressional charge for this evaluation limits its scope to the energy efficiency and fossil fuel programs because they are the ones under the jurisdiction of the subcommittee. DOE conducts other energy research programs, including ones in renewable and nuclear energy.1 The two program areas—energy efficiency and fossil energy—that lie within the scope of this study have expended about $22.3 billion in federal funds since 1978, or about 26 percent of the total DOE energy R&D expenditure of approximately $85 billion (2000 dollars) (NSF, 2000). There have been large differences in project scale, size, complexity, and time horizon between the energy efficiency and the fossil energy programs; these differences make any direct comparisons of results of the two programs difficult. Both programs have long histories and have undergone significant changes over the past two decades. The Office of Energy Efficiency and Renewable Energy came into being in its current form around 1982, having evolved from the Office of Conservation and Renewable Energy, the name by which it was known after DOE was founded by the Carter administration. The change in name reflected both the changeover to the Reagan administration and a shift in philosophy as the energy crisis eased. The Office of Energy Efficiency and Renewable Energy comprises five main program offices, three of which this study focuses on: the Office of Building Technology, State, and Community Programs (BTS); the Office of Industrial Technologies (OIT); and the Office of Transportation Technologies (OTT). Research in the Office of Fossil Energy has historically focused on two main programs: the Office of Coal and Power Systems (CPS) and the Office of Natural Gas and Petroleum Technology (NGPT). The coal and power systems program can be viewed as having gone through three phases since DOE was formed. The first phase, from the late 1970s to the 1   The committee is sensitive to the fact that the study covers only part of the energy research conducted by DOE, but it elected not to extend the study to include the entire technology portfolio.

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 early 1980s, entailed the push for energy security, development of alternative fuel supplies, and a focus on energy efficiency, with near-term commercial demonstration emphasized. The second phase, from the early 1980s to the mid-1980s, was characterized by the easing of the energy crisis as oil prices stabilized, and the CPS R&D programs shifted their attention to compliance with Clean Air Act Amendments. Environmental issues have come to dominate the third and current phase, providing the main impetus for CPS programs from the mid-1980s to the present. DOE’s oil and gas research, like its CPS research, has changed substantially since 1978. The history of the oil program can be divided into two periods: from 1978 to 1988 and from 1989 to the present. In the earlier period, the focus was on long-term, high-risk R&D, mostly for enhanced oil recovery from existing wells. In more recent years, the program has stressed near- and mid-term results, emphasizing technological solutions to improving production. At first, the natural gas program focused on production from unconventional natural gas resources, such as gas shales, tight sands, and coal-bed methane or gas hydrates. In recent years, the focus has shifted to the development of tools for finding natural gas, with a downstream program emphasis on gas-to-liquids technology. In response to the congressional charge, the National Research Council formed the Committee on Benefits of DOE R&D on Energy Efficiency and Fossil Energy (see Appendix A for committee members’ biographical information). The statement of task for this study describes the issues included in the committee’s review of DOE’s fossil energy and energy efficiency programs: The NRC committee appointed to conduct this study will conduct a retrospective examination of the costs and benefits of federal research and development since 1978 for advanced technologies in the Department of Energy’s program areas of fossil energy and energy efficiency. The committee will develop a comprehensive framework that, at a minimum, reflects the goals and public purposes of federal R&D (but which may be broader in scope), and using this framework will assess the benefits of federal energy R&D and will identify improvements that have occurred because of federal funding in (1) fossil energy technologies with regard to performance aspects such as efficiency of conversion into electricity, lower emissions to the environment and cost reduction; and (2) energy efficiency technologies with regard to more efficient use of energy, reductions in emissions and cost impacts in the industrial, transportation, commercial and residential sectors. In conducting this study, the committee will critically review written reports and hear presentations at its meetings related to the benefits and costs of federal R&D in the areas of fossil and energy end-use efficiency technologies, as noted above. The committee will: utilize the applicable literature on R&D strategies and the role of R&D in technological and economic development, develop a comprehensive framework for defining the range of benefits and costs, from quantitative to nonquantitative, of federal R&D and use this comprehensive framework as a basis for conducting its analysis. In developing this framework, consideration should be given to direct benefits related to program goals and other indirect benefits (for example, unexpected products or improvements in scientific understanding), as well as aspects of valuing these benefits (for example, optimum risk profiles, options values, timing of benefits); assess the benefits of R&D (in the areas of fossil energy and energy efficiency) in light of the framework developed and available information about these programs. In undertaking this analysis, the committee will review the historical context over the applicable time period (1978 to the present) and related policy, legislative, and strategy goals and purposes of the R&D; review studies that have been undertaken by DOE on the costs and benefits of its R&D efforts; review studies and/or evaluations by the private sector, consulting companies, public interest groups, academic researchers, and others on the costs and benefits of energy technology R&D investments; based on its framework, analysis, and observations, suggest strategies to inform future R&D choices. The committee will use consultants as needed to conduct analysis based on guidance from the committee. The committee will write a final report that addresses its statement of work outlined above and documents its conclusions and observations on the benefits and costs of federal energy R&D in energy efficiency and fossil energy technologies, including a list of significant accomplishments and intellectual contributions identified. To devise an approach to conducting the study, the committee carefully reviewed the statement of task and the background that led to its formulation. Three elements of the assignment appeared to be particularly important and were therefore instrumental in guiding the study design: The study should focus on outcomes. The task statement requires a retrospective examination of improvements that have already occurred. The committee therefore analyzed actual costs and actual benefits realized to date as its starting point for evaluating energy research. Developing a methodology is a central element of the task. The statement of task not only requires this, but it also speaks to the need for a methodology that can be applied to future research proposals. Accordingly, the committee gave great weight to developing an approach to characterizing outcomes that would be useful to future analysts. The main purpose of evaluating the benefits and costs of more than 25 years of energy research is prospective, not retrospective. In other words, the value of the analysis lies in the lessons that can be learned from past experience and in validating the analytic methodology developed by the committee. Because it could not evaluate in detail all of the re-

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 search projects in fossil energy and energy efficiency over this period, the committee selected projects for study and made decisions on the depth of analysis with these values in mind. (Subsequent chapters, notably Chapter 3, discuss the specific judgments that were made in this connection.) Equally important to the study design, however, are several issues that the committee elected not to address. To some degree, what was not done is the mirror image of the study priorities noted above. Nevertheless, it is useful for the understanding of the report to make explicit that the committee did not do the following: Attempt to evaluate the likelihood of achieving future results. The committee recognizes—and the reader should understand—that some of the research projects evaluated in the study are still active and have not yet had time to achieve the results expected of them. This is not to suggest that such projects will be unsuccessful, but only that maintaining a careful distinction between actual and promised outcomes is essential to rigorous evaluation. Assess whether federal funds devoted to energy research could have been better spent in other ways. The analysis presented in this report assesses relative costs and benefits and draws some conclusions about the circumstances that seem to be associated with research that produces more (or fewer) benefits than costs. Whether the benefits are sufficient to justify the costs, given the possible alternative uses of funds, is not within the scope of this study. ORGANIZATION OF THIS REPORT Central to the conduct of this study is the development of a comprehensive evaluation framework. Chapter 2 discusses the framework and the rationale behind its development and application; a detailed description of the analytic methodology appears in Appendix D. Chapters 3 and 4 then address the benefits and costs of a representative sample of energy efficiency and fossil energy programs, respectively. Appendixes E and F contain the case studies developed by the committee for the 39 programs. Chapter 5 provides the committee’s overall findings and recommendations for strategies to inform future energy R&D choices. REFERENCE National Science Foundation (NSF). 2000. Inventory of Historical Tables by Topic from Research and Development in Industry. Washington, D.C.: National Science Foundation 25:45-61.