Meeting Energy Demand in the 21st Century
Many Challenges and Key Questions
Gao ID: GAO-05-414T March 16, 2005
Plentiful, relatively inexpensive energy has been the backbone of much of modern America's economic prosperity and the activities that essentially define our way of life. The energy systems that have made this possible, however, are showing increasing signs of strain and instability, and the consequences of our energy choices on the natural environment are becoming more apparent. The reliable energy mainstay of the 20th century seems less guaranteed in the 21st century. As a nation, we have witnessed profound growth in the use of energy over the past 50 years--nearly tripling our energy use in that time. Although the United States accounts for only 5 percent of the world's population, we now consume about 25 percent of the energy used each year worldwide. Looking into the future, the Energy Information Administration (EIA) estimates that U.S. energy demand could increase by about another 30 percent over the next 20 years. To aid the subcommittee as it evaluates U.S. energy policies, GAO agreed to provide its views on energy supplies and energy demand as well as observations that have emerged from its energy work. This testimony is based on GAO's published work in this area, conducted in accordance with generally accepted government auditing standards, and on EIA's Annual Energy Review, 2003 and its Annual Energy Outlook, 2005.
America's demand for energy has, in recent decades, outpaced its ability to supply energy. As a result, the country has witnessed rapid price increases and volatility in some markets, such as gasoline, and reliability problems in others, such as electricity, where the blackout in 2003 left millions in the dark. Given these recent and sometimes persistent problems, as well as concerns about the impacts of energy consumption on air, water, and other natural resources, there is a growing sense that action is needed. Today, fossil fuels (coal, oil, and natural gas) provide about 86 percent of our total energy consumption, with the rest coming from nonfossil sources such as nuclear (8 percent) and renewables, such as hydroelectric energy and wind power (6 percent). Overall, the majority of the nation's energy consumption is met by domestic production. However, imports of some fuels have risen. For example, over the past 20 years, imports--primarily oil and natural gas--have doubled, and in 2003 these imports comprised about one-third of total domestic energy consumption. Imports are expected to increase still further in order to meet future domestic consumption. In light of the current and expected levels of imports, the United States is, and will increasingly be, subject to global market conditions, with the transportation sector especially affected. Global markets may face future difficulties in meeting the growing energy demands of developed nations while also meeting the demands of the developing world, particularly considering the explosive growth in some economies, such as China's and India's. If world supplies for some fuels do not keep pace with world demand, energy prices could rise sharply. GAO believes that a fundamental reexamination of the nation's energy base and related policies is needed and that federal leadership will be important in this effort. To help frame such a reexamination, we offer three broad crosscutting observations. First, regarding demand, the amount of energy that needs to be supplied is not fate, but our choice. Consumers, whether businesses or individuals, choose to use energy because they want the services that energy provides, such as automated manufacturing and advanced computer technologies. Accordingly, consumers can play an important role in using energy wisely, if encouraged to adjust their usage in response to changes in prices or other factors. Second, all of the major fuel sources--traditional and renewable--face environmental, economic, or other constraints or trade-offs in meeting projected demand. Consequently, all energy sources will be important in meeting expected consumer demand in the next 20 years and beyond. Third, whatever federal policies are chosen, providing clear and consistent signals to energy markets, including consumers, suppliers, and the investment community, will help them succeed. Such signals help consumers to make reasoned choices about energy purchases and give energy suppliers and the investment community confidence that policies will be sustained, reducing investment risk.
GAO-05-414T, Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions
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Testimony:
Before the Subcommittee on Energy and Resources, Committee on
Government Reform, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:00 p.m. EST:
Wednesday, March 16, 2005:
Meeting Energy Demand in the 21ST Century:
Many Challenges and Key Questions:
Statement of Jim Wells, Director, Natural Resources and Environment:
GAO-05-414T:
GAO Highlights:
Highlights of GAO-05-414T, a testimony to Darrell Issa, Chairman,
Energy and Resources Subcommittee, Committee on Government Reform,
House of Representatives
Why GAO Did This Study:
Plentiful, relatively inexpensive energy has been the backbone of much
of modern America‘s economic prosperity and the activities that
essentially define our way of life. The energy systems that have made
this possible, however, are showing increasing signs of strain and
instability, and the consequences of our energy choices on the natural
environment are becoming more apparent. The reliable energy mainstay of
the 20th century seems less guaranteed in the 21st century.
As a nation, we have witnessed profound growth in the use of energy
over the past 50 years”nearly tripling our energy use in that time.
Although the United States accounts for only 5 percent of the world‘s
population, we now consume about 25 percent of the energy used each
year worldwide. Looking into the future, the Energy Information
Administration (EIA) estimates that U.S. energy demand could increase
by about another 30 percent over the next 20 years.
To aid the subcommittee as it evaluates U.S. energy policies, GAO
agreed to provide its views on energy supplies and energy demand as
well as observations that have emerged from its energy work.
This testimony is based on GAO‘s published work in this area, conducted
in accordance with generally accepted government auditing standards,
and on EIA‘s Annual Energy Review, 2003 and its Annual Energy Outlook,
2005.
What GAO Found:
America‘s demand for energy has, in recent decades, outpaced its
ability to supply energy. As a result, the country has witnessed rapid
price increases and volatility in some markets, such as gasoline, and
reliability problems in others, such as electricity, where the blackout
in 2003 left millions in the dark. Given these recent and sometimes
persistent problems, as well as concerns about the impacts of energy
consumption on air, water, and other natural resources, there is a
growing sense that action is needed.
Today, fossil fuels (coal, oil, and natural gas) provide about 86
percent of our total energy consumption, with the rest coming from
nonfossil sources such as nuclear (8 percent) and renewables, such as
hydroelectric energy and wind power (6 percent). Overall, the majority
of the nation‘s energy consumption is met by domestic production.
However, imports of some fuels have risen. For example, over the past
20 years, imports”primarily oil and natural gas”have doubled, and in
2003 these imports comprised about one-third of total domestic energy
consumption. Imports are expected to increase still further in order to
meet future domestic consumption. In light of the current and expected
levels of imports, the United States is, and will increasingly be,
subject to global market conditions, with the transportation sector
especially affected. Global markets may face future difficulties in
meeting the growing energy demands of developed nations while also
meeting the demands of the developing world, particularly considering
the explosive growth in some economies, such as China‘s and India‘s. If
world supplies for some fuels do not keep pace with world demand,
energy prices could rise sharply.
GAO believes that a fundamental reexamination of the nation‘s energy
base and related policies is needed and that federal leadership will be
important in this effort. To help frame such a reexamination, we offer
three broad crosscutting observations. First, regarding demand, the
amount of energy that needs to be supplied is not fate, but our choice.
Consumers, whether businesses or individuals, choose to use energy
because they want the services that energy provides, such as automated
manufacturing and advanced computer technologies. Accordingly,
consumers can play an important role in using energy wisely, if
encouraged to adjust their usage in response to changes in prices or
other factors. Second, all of the major fuel sources”traditional and
renewable”face environmental, economic, or other constraints or trade-
offs in meeting projected demand. Consequently, all energy sources will
be important in meeting expected consumer demand in the next 20 years
and beyond. Third, whatever federal policies are chosen, providing
clear and consistent signals to energy markets, including consumers,
suppliers, and the investment community, will help them succeed. Such
signals help consumers to make reasoned choices about energy purchases
and give energy suppliers and the investment community confidence that
policies will be sustained, reducing investment risk.
[End of section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to participate in the Subcommittee's hearing on the future
direction of our nation's energy policies. Plentiful, reliable,
inexpensive energy--in its various forms, including gasoline, natural
gas, and electricity--has been the backbone of much of modern American
economic prosperity and the activities that essentially define the
American lifestyle. The United States accounts for only 5 percent of
the world's population but consumes about 25 percent of the energy used
each year worldwide. U.S. energy demand has increased over 25 percent
since 1980, and in 2003 amounted to the equivalent of about 790 billion
gallons of gasoline, or roughly 2,800 gallons for every man, woman, and
child in the country.
As shown in figure 1, energy consumption in the United States has
grown. While energy demand across residential, commercial, and the
industrial sectors includes demand for all types of energy sources,
such as oil, coal, and natural gas, demand in the transportation sector
is almost completely oil dependent.
Figure 1: Energy Consumption by Sector, 1949-2003:
[See PDF for image]
Note: BTU stands for British thermal units and is a standard unit used
to measure energy consumption. In 2001, the average household in the
United States consumes about 92 million BTUs per year.
[End of figure]
Increasing demand across our economy has, at times, strained our energy
system. For example, in recent years, natural gas prices have nearly
tripled and crude oil prices have more than doubled, and gasoline
prices now exceed $2.00 per gallon in Washington, D.C., San Francisco,
and other major cities. In addition, our energy supplies have also
witnessed problems, most notably in 2003 when the largest blackout in
U.S. history left as many as 50 million people in the dark. Further,
there have been indications that our energy infrastructure has not kept
up with changes in our demand for energy as illustrated by (1) the
nation's refinery capacity not keeping pace with the increasing demand
for gasoline, leading to increased imports of gasoline, and (2) the
electricity sector's transmission constraints periodically limiting the
flow of electricity in parts of the country. Lastly, our energy
dependence on other countries has increased, raising greater concern
about international turmoil in the Middle East, Russia, Venezuela, and
elsewhere.
As shown in figure 2, the United States has increased production
(generally through the extraction and use of oil, coal, and other fuels
from the land) of a wide range of fuels over the past 50 years to help
meet consumer demand. Today, fossil fuels account for about 80 percent
of our total domestic energy production, with the rest coming from
nonfossil sources such as nuclear electric energy, hydroelectric
energy, and nonhydroelectric renewable energy sources, such as wind
power. Despite the fact that the United States produces most of its
energy, imports of some fuels are rising to meet growing U.S.
consumption.
Figure 2: U.S. Energy Production, 1949-2003:
[See PDF for image]
[End of figure]
As shown in figure 3, over the past 50 years net imports of energy have
increased. This increase has been most dramatic over the past 20 years,
during which time energy net imports more than doubled, reaching 32
percent of our total consumption in 2003. The vast bulk of these
imports are oil and natural gas.
Figure 3: Domestic Production and Net Imports Needed to Meet
Consumption, 1949-2003:
[See PDF for image]
[End of figure]
Nearly all energy is supplied by private companies that also own the
energy supply infrastructure. Some of these companies are multinational
corporations with worldwide shareholders, while others operate only
locally. Further, most of the fuels used in the energy sector--
including oil, coal, natural gas, and nuclear fuel--are sold at prices
determined by competitive markets and, in some cases (such as crude
oil), international markets.
Over the years, the federal government has intervened in energy
markets, providing tax credits and other benefits to suppliers and
consumers of traditional and renewable energy. For example, the federal
government has granted tax incentives, direct subsidies, and other
support to the petroleum industry, as well as tax and other benefits to
the ethanol industry, in an effort to increase U.S. energy supplies.
Similarly, the federal government has also provided tax credits for the
production of energy using renewable energy resources, such as wind
turbines. While these tax incentives generally work to increase the
production of energy, they also generally decrease revenues accruing to
the U.S. Treasury.
Looking into the future, daunting challenges lie ahead. As shown in
figure 4, the Energy Information Administration (EIA), within the
Department of Energy (DOE), estimates that U.S. energy demand could
increase by about another 30 percent over the next 20 years, if current
trends hold. Meeting these projected increases could be more
challenging in the natural gas and petroleum industries, because
consumption of these fuels is forecast to increase by 37 percent and 33
percent, respectively, during that period. In addition, forecast
imports for these two fuels are expected to rise by over 140 percent
and 60 percent, respectively.
Figure 4: Forecast Energy Consumption, 2002-2025:
[See PDF for image]
[End of figure]
Unless changes are made, meeting the forecast increase in energy demand
could further stress an already strained system. From a domestic
perspective, the nation already faces energy supply constraints and
higher prices for some important fuels, as well as environmental
problems such as persistent air pollution in some cities. In addition,
from an international perspective, the United States is increasingly
subject to global markets for key energy sources, such as crude oil
and, increasingly, for natural gas. Global markets may face
difficulties in continuing to meet the growing energy demands of
developed nations such as the United States, while also meeting the
demands of the developing world, particularly in light of the explosive
growth in some economies, such as China's and India's. If world
supplies do not keep pace with world demand, energy prices could rise
sharply.
Just last month, as part of our 21st Century Challenges
report,[Footnote 1] we identified two broad questions focused on
reexamining the nation's energy base and related policies:
* To what extent are federal energy policies and incentive structures
adequately preparing the nation to satisfy its energy needs over the
long term?
* What is the appropriate balance between efforts to promote enhanced
production of fossil fuels, alternative renewable energy sources, and
the promotion of energy conservation?
* Given the importance of energy to our nation's economy and current
lifestyle choices, it is generally recognized that a secure,
affordable, reliable, and environmentally sound energy supply is
needed. However, the reliable energy mainstay of the 20th century seems
less guaranteed in the 21st century. In the context of developing our
nation's energy policies, we are providing our views on energy supply
and demand based on our published work in this area, conducted in
accordance with generally accepted government auditing standards. In
addition, we are providing information on forthcoming work, as GAO
continues to report on a range of energy activities and policies of the
federal government.
In summary, based on past work and considering recent EIA forecasts,
three broad crosscutting observations emerge that could help frame
congressional efforts to develop the nation's energy policies:
* First, regarding demand, the amount of energy that needs to be
supplied is not fate, but our choice. Consumers, whether businesses or
individuals, choose to use energy because they want the services that
energy provides, such as automated manufacturing, advanced computer
technologies, and many high-technology household amenities. However,
consumers can play an important role in using energy wisely by, among
other things, choosing technologies that deliver the same services but
that use less energy or reducing their energy usage when it is valuable
to them to do so. For example, in electricity markets some utilities
and system operators have created a variety of electricity pricing and
other programs that encourage customers to adjust their usage in
response to changes in prices or other factors. These "demand response"
programs offer substantial benefits to participants and improve the
functioning of these markets because they provide more accurate price
signals to consumers and encourage more careful energy use while
providing better incentives for conservation and/or energy efficiency.
* Second, all of the major fuel sources--traditional and renewable--
face environmental, economic, or other constraints or trade-offs in
meeting projected increases in demand. Consequently, all energy sources
will be important in meeting expected consumer demand in the next 20
years and beyond. Meeting future demand will be particularly
challenging for the transportation sector, where the United States is
almost completely dependent on oil--more than half of which is
imported. With just 5 percent of world population, the United States
consumes roughly 45 percent of world gasoline. Further, the same
international markets that supply U.S. needs will also need to supply
countries in the developing world, such as China and India, which are
experiencing increases in demand that far exceed even our own
increasing thirst for oil.
* Third, whatever federal policies are chosen, providing clear and
consistent signals to energy markets, including consumers, suppliers,
and the investment community, will help them succeed. Energy consumers
need clear and consistent signals so that they can make reasoned
choices with regard to purchases of energy-consuming equipment that
help to determine their long-term energy demand. Energy suppliers
require clear signals regarding national policies and confidence that
those policies will be sustained over time in order to undertake the
substantial investment needed to support expected increases in
consumption. The investment community also needs these clearly
articulated policies to determine how much to invest in current and
future infrastructure, new products, and new technologies.
Specifically, our testimony presents an overall energy picture,
discussing each of the major energy sources used in the United States,
along with consumer demand. We end each fuel discussion with examples
of key questions facing the Congress, the executive branch, states,
industry, and consumers.
Oil: Our Largest Energy Source, but Mostly Imported:
Oil is the largest single energy source used in the United States and
remains perhaps the most visible energy source to most consumers. Oil,
and the gasoline refined from it, provided the critical energy for the
automobile that mobilized America. Oil remains at the center of the
transportation sector and at the center of our national energy policy
debate.
In 2003, oil accounted for about 40 percent of the total U.S. energy
consumption and the United States consumed about 7.3 billion barrels of
crude oil--about 20 million barrels per day. Most oil is used in the
transportation sector as gasoline, diesel, and jet fuel, with oil-based
products accounting for over 98 percent of the U.S. transportation
sector's fuel consumption. In addition, oil is also used as a raw
material in the manufacturing and industrial sectors; for heating in
the residential and commercial sectors; and, in small amounts, for
generating electric power. Although the United States accounts for
about 5 percent of the world population, we consume about 25 percent of
total world oil demand. Although today the United States and its
industrialized counterparts currently account for the bulk of the world
oil demand, demand is growing rapidly in the developing nations,
especially those in Asia, such as China and India.
The United States relies on imported oil for more than half of its
supply and appears likely to increase its reliance in the future.
Historically, the United States produced most of the oil it consumed.
However, U.S. oil production began to decline in 1970 and has dropped
by about 40 percent since then. Since 1970, imports of crude oil and
other products have increased 255 percent, and imports now comprise
nearly 56 percent of the U.S. oil supply. Part of the reason for the
rising imports is cost; it has been less costly to purchase oil
produced in other countries than it has been to produce it in the
United States.
Rising U.S. imports have increasingly been supplied by countries
belonging to the Organization of Petroleum Exporting Countries (OPEC),
which collectively provided about 42 percent of our total imports
during 2003. Since about 20 percent of our imports came from the
Persian Gulf region and 14 percent came from Saudi Arabia, our reliance
on these imports has made the United States subject to the political
instability of the Middle East witnessed in recent years. We also
import a large amount of oil from our neighbors in North America; about
30 percent of our imported oil came from Canada and Mexico. Going
forward, the United States will increasingly rely on imported oil
because although the United States is currently the world's third
largest oil producer, U.S. proven oil reserves account for only about 2
percent of total world reserves. In contrast, OPEC holds about 68
percent of total world oil reserves.
The prices of crude oil and refined petroleum products, such as
gasoline and home heating oil, have been volatile over the years. Since
the 1970s, the crude oil market has, at times, been heavily influenced
by the OPEC cartel. Because the member countries control a large share
of world production and total reserves, these countries have been able
to influence crude oil prices by limiting supply through the use of
country-by-country production quotas. These quotas have, at times,
served to maintain a tight balance between world supply and world
demand. However, because of the relative political instability in the
Middle East and some of the other OPEC countries (such as Nigeria and
Venezuela), occasional oil supply disruptions and price shocks have
been a fact of life for about the past 30 years and may remain an issue
for the foreseeable future. Although crude oil prices play a large role
in determining the prices for gasoline and other refined petroleum
products, other factors also influence the volatility of gasoline
prices, including limited refinery capacity, low inventory levels
relative to demand, supply disruptions, and regulatory factors--such as
various gasoline formulations that are used to meet federal and state
environmental laws. Federal and state taxes on gasoline and other
products serve to raise the level of prices, but these taxes do not
fluctuate often and so do not contribute to price volatility.
Demand has pressed the limits of the production and delivery
infrastructure in the oil industry in recent years. While U.S. crude
oil production has fallen, rapidly rising imports have required more
ocean tankers of crude oil to be off-loaded each year--forcing
expansions of ocean crude oil terminals and coastal refineries. Because
some refineries have closed, and no new ones have been built since
1976, there are fewer refineries available to convert crude oil into
gasoline and other products. Although increases in overall output have
been achieved through expanding capacity at the remaining refineries
and operating those refineries at very high production levels, the
nation's domestic refining capacity has lagged overall demand growth
for petroleum products. Further, the network of pipelines that delivers
refined petroleum products also operates at high levels of capacity,
sometimes limiting the amount of fuel that can be shipped. Finally, the
capacity of gasoline terminals that distribute fuel to local gas
stations is also limited in some parts of the country.
Over the past 30 years, the federal government has undertaken many
efforts designed to influence petroleum markets and demand for
petroleum based fuels. For example, in the mid-1970s, the federal
government developed the Strategic Petroleum Reserve, part of an
international reserve effort designed to mitigate the economic impacts
on world economies of any large, sustained disruption to the oil
supply. In addition, the federal government has supported a number of
research and development and regulatory efforts designed to reduce
demand for petroleum fuels in transportation. For example, the federal
government supported the Partnership for a New Generation of Vehicles
in order to aid U.S. automobile manufacturers in developing gas-
electric hybrid vehicles. In addition, the federal government has
encouraged the development and deployment of technologies focused on
identifying alternatives to petroleum-based fuels, such as the recent
FreedomCAR initiative--a program to help develop fuel-cell technologies
for vehicles.
GAO has issued numerous reports on aspects of the petroleum sector,
including gasoline markets and government efforts to reduce consumption
of gasoline in vehicles among other areas. We also have reported on
government efforts to improve gasoline vehicle efficiency through the
use of gasoline-electric hybrid technologies and to shift vehicle fuel
use to alternatives such as compressed natural gas or hydrogen-powered
fuel cells. GAO has also noted that low gasoline prices do not reflect
external costs associated with gasoline use, such as health and
environmental impacts of air pollution or the economic cost that may
result from the nation's vulnerability to oil price shocks.
Consequently, low gasoline prices work to discourage energy efficiency
and the use of alternative fuels. Most recently we reported on the
effects of mergers and market concentration in the U.S. petroleum
industry, noting that mergers and increased market concentration that
occurred in the mid-to-late 1990s contributed to higher wholesale
gasoline prices--averaging about 1 to 2 cents per gallon. Other factors
such as changes in gasoline formulations and supply disruptions may
have also contributed to higher gasoline prices during this period.
Later this year, GAO will release a primer on how gasoline is made and
distributed, what factors influence the price of gasoline, and why
gasoline prices change, among other things. In forthcoming work
requested by the Congress, GAO will report on the presence of multiple
fuel formulation requirements in some parts of the country and how the
expansion of these fuels have affected prices.
Key Questions:
* What are the potential implications for the United States of
increased world reliance on oil supplies from politically unstable
sources, such as OPEC countries?
* To what extent can the United States increase refining capacity and
other delivery infrastructure to meet growing demand for petroleum
products?
* What are the implications if there are further consolidations in the
U.S. petroleum industry?
* Are there ways to better reflect the full societal cost of using
gasoline in gasoline prices, and what are the trade-offs of doing so?
Coal: Balancing the Use of an Abundant Domestic Resource with Its
Environmental Consequences:
Coal has been a key energy resource in the United States for over 100
years. Over this time, the use of coal has provided low-cost
electricity but has brought with it environmental consequences, such as
air pollution. Choices regarding the use of coal revolve around
balancing these consequences, in the light of new technologies to
reduce them, with the energy benefits of using this plentiful domestic
resource.
In 2003, coal accounted for about 23 percent of total U.S. energy
consumption. Nearly all of the coal consumed in the United States, 92
percent, was used in the production of electricity, with almost all the
remaining 8 percent used directly by industries such as steel
manufacturing. Coal-fired power plants provided about half of total
electricity generation in the United States in 2003, with larger shares
in some parts of the country such as the mountainous West and the
Midwest. Coal is expected to remain a vital element in the country's
energy supply; EIA's most recent forecast indicates that coal would
continue to provide about 20 percent of the country's energy needs in
2025.
The United States has substantial domestic coal resources, leading some
to refer to the United States as "the Saudi Arabia of coal." Nearly all
of the coal used in the country is produced domestically. In 2003,
using EIA data, estimates of recoverable U.S. coal reserves could last
over 250 years, based on current usage. Coal is generally extracted
from either surface, or underground mines, however underground coal
also contains combustible gas, called coal bed methane, that can be
removed using wells and burned to produce usable energy similar to
conventional natural gas. Coal reserves are located across the country,
with large reserves in the West, the Midwest, and the Appalachian
Mountains, but consumption of coal from the West has increased sharply
in recent years. A large portion of the coal reserves are located on
federal lands and are subject to direct federal controls, such as
payment of royalties, limits on the amount of federal land an
individual company may mine, and requirements that surface land be
restored to conditions similar to natural conditions when mining ends.
Partly owing to the abundance of coal and technological improvements in
the mining industry, coal prices have been declining in real terms
since the mid-1970s.
The production and use of coal have a variety of environmental
consequences, including those related to mining and those related to
the pollution that is emitted when coal is burned. Surface mining has
the most significant impacts on land resources, in some cases
substantially altering the terrain. Both surface and underground mines
can significantly affect water resources by introducing pollution or
silt into groundwater or waterways. Regarding air quality, combustion
of coal in power plants emits pollutants and contributors to pollutants
such as nitrogen oxides (NOx), sulfur oxides (SOx), particulate matter
(PM), and toxic chemicals, such as mercury. Although some older power
plants emit high levels of these substances, significant advancements
have been made in the development of new power plants, utilizing new
technologies that substantially reduce emissions. In addition to these
pollutants, coal plants release a substantial amount of carbon dioxide,
a gas that is common in nature but has been linked with the "greenhouse
effect," a greater-than-normal rise in the planet's temperature.
Although some countries have agreed to attempt to reduce emissions of
carbon dioxide and other "greenhouse" gases, the United States does not
currently regulate the emissions of such gases. However, DOE has
supported research focused on developing a zero-emission coal-fired
power plant that would not emit any pollutants or carbon dioxide into
the air. In 2005, according to an industry policy group, 100 or more
power plants featuring advanced technologies that substantially reduce
emissions of pollutants are being considered for development in the
United States.
We have issued reports and testified on two primary coal related
issues: technologies supported under DOE's Clean Coal Technology
program and the environmental consequences of using coal in power
plants. Over the past several years, we have reported on the Clean Coal
Technology program, noting that while DOE has reported successes in
deploying new technologies, there have been management problems with
the program and that there may be important lessons that should be
considered in future similar efforts, such as the value of cost-sharing
agreements and federal cost-sharing limits. We have also reported (1)
that coal-fired power plants that have not been required to install
modern pollution reducing equipment emit higher levels of pollutants
such as NOx and SOx than plants where this equipment is present, and
(2) that increased electricity generation in order to meet expected
growth in demand may increase emissions of certain pollutants. In
forthcoming work requested by the Congress, GAO will report on the
effectiveness and cost of technologies to reduce mercury emissions, a
toxic element present in coal that is emitted when coal is burned.
Key Questions:
* How can the federal government balance the use of this abundant
domestic energy source with its regulated and unregulated environmental
consequences?
* Where will additional coal be mined, where will new power plants be
located, and are additional infrastructure improvements needed?
* What is the potential role for coal bed methane, what are the trade-
offs of extracting it, and what, if anything, should the federal
government do to influence its development and production?
* What changes in controls, if any, should the federal government make
to how coal can be mined on federal land and elsewhere?
* What role, if any, should the federal government play in providing
incentives for using coal in ways that are safer for the environment?
Natural Gas: A Widely Used and Versatile Fossil Fuel:
Natural gas, the fuel of choice recently, is one of the most versatile
and widely used fuels--significant amounts are used as a raw material
in the fertilizer, chemical, and other industries; for space heating in
the industrial, commercial, and residential sectors; and for
electricity generation. Until recently, prices have been low and use of
natural gas for space heating and for electricity generation has
expanded rapidly. Meeting the projected future growth of natural gas
demand through delivering additional supply poses challenges.
Natural gas plays a vital role in meeting the country's national energy
demand, accounting for about 23 percent of the total energy consumed in
the United States. Use of natural gas has been growing rapidly since
the mid-1980s, with consumption increasing by about 35 percent from
1986 through 2003. Natural gas demand has been the greatest in the
industrial sector, accounting for about 37 percent of total demand in
2003; followed by the residential sector and electric power, each
accounting for about 22 percent; then the commercial sector, at about
14 percent. The rest, about 3 percent, is used in the transportation
sector, mostly as fuel for pipelines. A significant share of the
increased demand in recent years has resulted from increased use of
natural gas to generate electricity. This use has increased by 79
percent since the repeal of the Powerplant and Industrial Fuel Use Act
in 1987, which had restricted construction of power plants using oil or
natural gas as a primary fuel; natural gas is now the primary fuel in
new power plants. EIA estimates that total natural gas demand could
increase 50 percent in the next 25 years.
Although natural gas prices remained low for many years, in recent
years they have increased dramatically. From 1995 to 2004, average
wellhead prices for natural gas increased nearly three-fold; rising
from $1.55 per thousand cubic feet to $5.49 per thousand cubic feet.
These higher prices for natural gas may have contributed to industrial
companies reducing or ceasing U.S. operations. EIA data indicate that
demand has fallen rapidly in the industrial sector, where consumption
decreased by 16 percent from 1997 through 2003.
Historically, almost all the natural gas used in the United States has
been produced here, but a small and growing share is imported. Most
natural gas production involves extracting gas from wells drilled into
underground gas reservoirs, although some natural gas is generated as a
by-product of oil production. In 2003, domestic sources provided about
85 percent of total consumption. Historically, most of the country's
natural gas came from Texas, Oklahoma, and Louisiana. However, the
Rocky Mountain region, Alaska, and areas beneath the deeper waters of
the Gulf of Mexico are becoming increasingly important in supplying
natural gas. Overall, from 1994 through 2003, domestic annual
production held steady at about 19 trillion cubic feet. In 2003, the
United States imported about 15 percent of the total natural gas
consumed, with nearly all of it coming from Canada via pipeline.
However, a small share is shipped on special ocean tankers as liquefied
natural gas (LNG) from countries such as Trinidad and Tobago, Nigeria,
and others. Looking ahead, the Energy Information Administration
estimates that U.S. consumption could increase to about 31 trillion
cubic feet (TCF) by 2025, expanding the gap relative to U.S. production
and requiring increasing imports to meet U.S. needs.
The United States still has substantial undeveloped natural gas
resources, but some of these resources are located under federal lands,
and access to some of these resources is restricted. For example, about
40 percent of the natural gas resources on federal land in the Rocky
Mountain region are not available for development. Additional natural
gas reserves are located in federally controlled offshore areas or
other areas and are not available for development at this time.
Extensive drilling for natural gas can substantially modify the
surrounding landscape, and in some cases can adversely affect wildlife
and its habitat, degrade air and water quality, and decrease the
availability of groundwater to ranches and houses that may depend upon
it. The federal government is required to consider these environmental
consequences when determining if, and how, natural gas will be
extracted from federal lands. In response, the natural gas industry has
and continues to use more advanced drilling methods and processes to
mitigate future adverse impacts.
Meeting the sharp increases forecast for natural gas demand could also
require substantial increases in infrastructure, such as new pipelines
and LNG terminals. In particular, increasing natural gas supplies may
require greater pipeline capacity and new pipelines. For example, over
the past 20 years the federal government has considered a variety of
issues with financing and building a new pipeline across federal and
state lands to deliver natural gas from Alaska. The federal government
is involved in the regulation and permitting of natural gas pipelines,
particularly those that must traverse federal lands. To meet the need
for sharply higher imports of natural gas, some experts believe that
the United States may need to build more LNG terminals. To date,
however, such facilities have not been built due to economic, safety,
and security concerns. Consequently, it is not clear whether the United
States can effectively compete with other countries for these supplies.
Over the last several years, we have issued a number of reports on
natural gas, including reports on the natural gas markets and their
oversight, various approaches for compensating the federal government
when natural gas is removed from federal land, and the impacts of
higher natural gas prices on certain industries. In 2002 and 2003, for
example, we issued reports analyzing natural gas markets and their
oversight. We noted that (1) prices generally increase because limited
supplies have not been able to react quickly enough to changes in
demand; (2) the federal government (e.g., the Federal Energy Regulatory
Commission and EIA) faces significant challenges in overseeing natural
gas markets and ensuring that prices are determined in a competitive
and informed marketplace, minimizing unnecessary price volatility; and
(3) buyers of natural gas have options to reduce their exposure to
volatile prices through the use of long-term contracts and financial
hedging instruments. In forthcoming work requested by the Congress, GAO
will report on federal efforts to understand and manage risks
associated with potential terrorist attacks on LNG shipments and other
tankers.
Key Questions:
* Should the federal government encourage further development of
domestic natural gas on federal lands, and can it ensure that
environmental impacts are adequately mitigated?
* What are the infrastructure needs of the natural gas industry,
including natural gas pipelines generally and in Alaska in particular,
and what role, if any, should the government play in facilitating the
development of this infrastructure?
* What are the implications for consumers (residential, commercial,
industrial, and electric power) of the increasing reliance on natural
gas to generate electricity?
* What are the economic and other barriers and/or trade-offs to
developing an infrastructure to support increases in LNG shipments, and
what role, if any, should the federal government play?
* To what extent is the federal government positioned to ensure that
natural gas prices are determined competitively?
Nuclear Energy: Emission-Free Energy Source, but with Waste Storage
Problems and Safety/Security Concerns:
Nuclear energy was once heralded as the single answer to all of the
country's energy woes, with predictions that electricity would soon be
"too cheap to meter." While these enormous expectations have not been
met, nuclear energy has become an important part of the country's
current energy picture and may remain that way for years to come.
Whether we can continue to rely on, or expand our use of, nuclear
energy in the future at existing plants or at new plants based on new
designs, hinges on solving the long-term waste storage problem as well
as resolving concerns over safety and security.
Nuclear energy currently accounts for about 8 percent of U.S. national
energy consumption. Nearly all nuclear energy is used to generate
electricity, and nuclear plants are important contributors to total
U.S. electricity production, providing about 20 percent in 2003. The
first commercial nuclear power plant came on line in 1957, and the
country witnessed a flurry of construction from the late 1960s through
the 1980s. Many nuclear plants operating today were initially licensed
for 40 years, and many are now approaching the end of their licenses.
Since an accident at the Three Mile Island nuclear plant in 1979 raised
concerns regarding the safety of nuclear plants, no new plants have
been ordered in the United States, and none has been brought on line
since 1996. In addition, many of the plants that were completed
witnessed multibillion dollar cost overruns.
Over the past several years, a number of nuclear generating units have
been retired, but because the remaining 104 units have increased their
productivity, the output actually increased by about 13 percent from
1998 through 2003. This increase in productivity has been impressive;
the average annual capacity factor[Footnote 2] has increased from 71
percent in 1997 to 90 percent in 2004. These increases in productivity
and other improvements have led some plant operators to seek to operate
some plants at somewhat higher capacity.
There appears to be renewed interest in extending the licenses of some
existing plants and even building new plants. Interest in nuclear power
plants has increased, in part, because they do not emit regulated air
pollutants such as nitrogen oxides, sulfur dioxides, and particulate
matter that can be costly to control, or carbon dioxide, a greenhouse
gas, that many in the electricity industry believe might be regulated
in the future. Given the improved performance, limited air emissions,
and production cost advantages of nuclear power plants, some companies
operating existing nuclear plants have already had them relicensed
through the Nuclear Regulatory Commission (NRC) to operate for up to
another 20 years, and others have started similar efforts. In addition,
there have been trade industry reports that a number of utilities and
other energy companies are actively considering submitting applications
to build new plants. Over the past 20 years, plants have continued to
be built overseas. New designs have emerged and foreign manufacturers
have gained significant experience building them. Nuclear energy plays
a large role in supplying energy in France, Germany, Canada, Japan, and
other developed nations. Although nuclear plants remain very costly to
build compared to some other plant types, they have lower fuel and
other operating costs and can produce electricity at a lower cost than
new plants that use fuels such as coal or natural gas--the primary
energy source used in new U.S. power plants. In this country, NRC has
approved new reactor designs and NRC and the Department of Energy are
working to reduce the approval and construction lead times for
potential new plants.
Although the United States has a large domestic supply of uranium, the
nation increasingly relies on international markets to obtain the
nuclear fuel used here. Historically, the fuel used at U.S. reactors
has been produced here. However, several factors have combined to
reduce the competitiveness and capacity to domestically supply reactor
fuel, including falling prices for reactor fuel on international
markets and factors surrounding the 1998 privatization of the United
States Enrichment Corporation (USEC). In response to the changes in the
market, USEC closed the Portsmouth, Ohio, fuel plant leaving only the
facility at Paducah, Kentucky, as the domestic source. Both France and
Japan have advanced facilities that produce nuclear plant fuel, and
these provide a large and growing share of international supplies,
including those used in the United States.
Although nuclear plants do not emit pollutants, they produce
radioactive waste, including the highly radioactive waste that must be
stored in isolation for thousands of years. The federal government
committed to develop a permanent storage facility that would receive
this waste by 1998, but delays have pushed the potential opening of the
facility to the 2012 to 2015 time frame. Efforts to develop the
facility have focused on storing the waste deep under Yucca Mountain in
the desert north of Las Vegas, Nevada. In 2002, NRC reported that about
45,000 tons of spent fuel from nuclear plants was stored in the United
States. Because the permanent repository has not been completed, the
highly radioactive waste remains stored at power plants and other
facilities and has been the subject of several lawsuits.
Nuclear power plants have been operated safely, largely without
incident. Nuclear power plants contain radioactive materials that if
released could pose catastrophic risks to human health over an
expansive area, but are designed and operated to avoid such an event
and incorporate measures to protect the plant from attack. The Nuclear
Regulatory Commission, among other things, oversees these plants,
conducting periodic inspections of the plant equipment and evaluating
security. However, since the terrorist attacks of September 11, 2001,
nuclear plants have emerged as a key security concern and attention on
these plants has increased. Industry expects that new plant designs
will further reduce safety and security risks, incorporating features
that, among other things, automatically cool the nuclear reaction.
We have issued a number of reports dealing with aspects of nuclear
energy covering three key areas: NRC's oversight of safety issues at
the existing nuclear plants; the development of a permanent storage
facility for the highly radioactive waste produced by nuclear plants;
and the potential vulnerability of these plants in light of the
terrorist attacks of September 11. In May 2004, we issued a report on
the discovery that corrosion had eaten a pineapple-sized hole in the
nuclear reactor vessel head at the Davis-Besse power plant in Ohio that
did not result in a radioactive release but highlighted problems with
NRC's inspections and oversight. We have issued a series of reports,
spanning more than 20 years, that focus on various aspects of
developing of a permanent nuclear waste storage facility. In 2002, we
reported (1) that it would be premature for DOE to recommend the
facility at Yucca Mountain to the President as a suitable repository
for nuclear waste; (2) that DOE was unlikely to achieve its goal of
opening a permanent storage repository at Yucca Mountain by 2010; and
(3) that DOE did not have a reliable estimate of when, and at what
cost, such a repository could be opened. We have also issued reports
concerning the vulnerability of nuclear power plants to terrorist
attacks. In September 2004, we testified that NRC was generally
approving plants' new security plans on the basis of limited details in
the plans and without visiting the plants. In forthcoming work
requested by the Congress, GAO will undertake a comprehensive review of
NRC's reactor oversight process and how NRC ensures that plants operate
safely. GAO will continue to examine homeland security issues related
to protecting commercial nuclear power plants from terrorist attacks.
Key Questions:
* What role should nuclear energy continue to play in providing the
nation's energy needs in view of the aging of existing plants?
* Should new nuclear power plants be built in the United States, and
can their design and construction make sense from a business standpoint
while providing the safety and security assurances important to
surrounding communities?
* How can existing and future nuclear waste generated by power plants
be managed in an appropriate and timely manner?
* Are changes needed in how the industry and NRC ensure that plants are
operated safely and securely, and is enough being done to protect
nuclear plants from terrorist attacks?
Electricity: In the Midst of Change:
Electricity has emerged as one of the essential elements in modern
life. Today, electricity lights our homes, enables our businesses to be
more productive through the use of computers, and creates the basis for
our modern quality of life, providing power for everything from our
morning coffee to our nightly television news. Unlike the other types
of energy that we have discussed--so-called primary sources of energy-
-electricity is generated through the use of the other energy sources
(such as when natural gas is burned in power plants to generate
electricity). Encouraged by the federal government, the electricity
industry is in the midst of historic changes. Assessing that transition
and determining whether the federal government can improve how
electricity markets function remains a focus for federal policy.
Electricity use has grown steadily in recent years. From 1980 through
2003, the quantity of electricity sold increased by 75 percent, with
the largest increases coming in the residential and commercial sectors.
Electricity is used in these sectors for space heating and for cooling,
lighting, and operating small appliances, such as computers and
refrigerators. Industrial consumption declined slightly over this
period, reflecting the contraction of manufacturing, including some
large industrial users of electricity such as the aluminum and steel
industries.
In 2003, over 70 percent of electricity was generated using fossil
fuels, with over 50 percent coming from coal-fired power plants, about
16 percent from natural gas, and small amounts from petroleum and other
fossil fuels. In recent years, new power plants have predominantly
relied on natural gas. Nuclear energy provides about 20 percent of
electricity generation, hydroelectric energy provides about 7 percent,
and a variety of renewable resources, such as wind turbines, provide
the remainder.
The federal government has a direct role in supplying electricity,
through the federally controlled Power Marketing Administrations, which
market electricity produced by federally owned dams and other power
plants and which own an extensive transmission network to deliver that
electricity. These entities initially aided in the federal mission to
bring electricity to rural areas; however, most now serve major
metropolitan areas, in addition to some rural customers.
Historically, electricity has been produced and delivered by local
monopoly utilities within a specific area, but this has been changing.
The electricity sector is restructuring to foster more competition and
provide an increased role for open markets. Competition is already
under way for the wholesale markets that the federal government
regulates. To facilitate fair wholesale competition, the federal
government has also pressed for change in what entities control
transmission lines--by approving the creation of independent
transmission operators to take the place of utilities in performing
this function. Some states, such as California and Pennsylvania, had
also moved to introduce competition to state-regulated retail markets,
where most consumers obtain their electricity. Although the electricity
industry is restructuring to include a greater role for competition,
the federal government still oversees wholesale electricity markets
through the Federal Energy Regulatory Commission (FERC). Because
federal actions have restructured wholesale markets nationwide and
states have variously chosen to restructure the markets that they
oversee, the national electricity market is currently a hybrid,
somewhere between competitive and regulated.
Unlike the other forms of energy, the amount of electricity supplied by
power plants must be balanced, on a second-to-second basis, with the
amount of electricity consumed in homes and businesses. To do this,
utilities or independent entities direct the production of electricity
and its movement over transmission lines to avoid blackouts. In some
cases, such as in California in 2000 and 2001 and more recently in the
Northeast in 2003, the balance between supply and demand was disrupted
and blackouts occur.
Electricity demand is projected to increase by at least 36 percent by
2025, and the industry may require significant investment in power
plants and transmission lines to reach those levels. The National
Energy Policy Development report estimated that the United States may
need to add as many as 1,900 power plants to meet forecasted demand
growth. In addition, because the existing network of power lines
frequently experiences congestion, the capacity of many key
transmission lines may need to be increased to move electricity from
these new plants and improve the reliability of the existing system.
We have reported on the development of competition in the electricity
industry and evaluated the oversight of electricity markets. For
example, in one report we found that the way the market was structured
in California enabled some electricity sellers to manipulate prices. We
also reported on the ability to add new power plants in three states,
concluding that the success of restructured markets hinged on private
investment in power plants and that this investment was reduced by
higher levels of perceived risk in some markets, such as in California.
Further, we recently reported on the potential value of empowering
consumers to manage their own electricity energy demand in order to
save money and improve the functioning of these markets. Allowing
consumers to see electricity prices enables them to reduce their usage
when prices are high--reducing their energy bills and improving the
functioning of the markets. Following the 2003 blackout, we issued a
report that highlighted challenges and opportunities in the electricity
industry, including whether reliability standards should be made
mandatory and whether control systems critical to the electricity
industry have adequate security. Regarding oversight of electricity
markets, we reported that while the Federal Energy Regulatory
Commission has made progress in revising its oversight strategy, it
still faced challenges in better regulating these markets. In
forthcoming work requested by the Congress, GAO will assess progress in
reporting electricity market transactions for use in developing market
indexes and the adequacy of controls over this reporting.
Key Questions:
* To what extent does the division of regulatory authority between the
federal government and the states limit the electricity industry's
ability to achieve the benefits expected from the introduction of
competition in electricity markets?
* What changes are necessary to federal and state monitoring and
oversight of electricity markets to ensure that they are adequately
overseen?
* Will FERC's actions to promote reliability be sufficient, or will
additional actions be needed to improve compliance with reliability
rules?
* How does continued uncertainty about how the future of electricity
restructuring and electricity markets affect electricity companies,
investment in new plants and transmission lines, and consumer prices?
* What role should the federal Power Marketing Administrations play in
restructured electricity markets?
* To what extent are homeland security principles being integrated into
new electricity infrastructure and business processes?
Renewable and Alternative Energy Sources: What Role Will They Play in
the Future?
Renewable energy sources, such as hydroelectric dams, ethanol, wind
turbines, and geothermal and solar applications, currently comprise a
small percentage of the total energy resources consumed in the United
States. Several alternative sources, such as hydrogen and fusion power,
may offer potential long-term promise, but research remains at an early
stage. While these renewable and alternative energy sources have a
nearly unlimited domestic supply, are perceived as relatively clean,
and help diversify the U.S. energy supply, technical problems and high
costs relative to other options have limited their use.
According to EIA, in 2003 renewable and alternative energy sources
accounted for slightly more than 6 percent of the total U.S. energy
consumption. Hydropower is the largest single source in this category
and makes up over 45 percent of all renewable and alternative energy
consumed. Hydropower generation, which varies due to weather
conditions, has fluctuated at about the same level since the 1970s.
Wood accounts for about 34 percent of total renewable energy, although
its use has declined since 1989. Waste and other byproducts, such as
municipal solid waste, landfill gas, and biomass, account for about 9
percent and their use has been relatively flat since the mid-1990s.
Geothermal energy use has decreased slightly since it peaked in 1993
and now accounts for about 5 percent of the total. Alcohol fuels, such
as ethanol, make up about 4 percent of the total, but their use has
increased rapidly in recent years, almost doubling from 1999 through
2003. Wind energy accounted for about 2 percent of the total renewable
energy consumed in 2003 but has witnessed substantial and persistent
growth in recent years, more than tripling from 1998 through 2003.
Solar energy accounts for about 1 percent of all renewable and
alternative energy consumed, and its use has declined slightly but
steadily since 1997, although use of some specific solar technologies
such as photovoltaic solar cells that convert sunlight directly into
electricity has grown in recent years.
Renewable energy technologies are increasingly becoming part of global
markets and are, in some cases, owned by large multinational energy
companies such as oil companies. Solar and wind energy have grown
substantially in these markets, but remain at relatively low levels in
the United States. Growth in wind power has benefited from improvements
in wind turbine technology and the availability of government tax
credits here and overseas, both of which have improved the
competitiveness of wind power technologies with more traditional forms
of energy. EIA estimates, however, that if the federal government
removes the tax credit, the U.S. growth in the generation of wind power
will almost stop. However, EIA estimates that if the government
maintains the tax credit, wind power generation in the United States is
expected to grow nearly seven-fold over the next 20 years. Solar
technologies, especially solar cell technologies that produce
electricity, have supplanted traditional technologies, such as
generators for some remote applications, and sales of solar cells have
expanded rapidly worldwide, albeit from a small base.
Several alternative sources may offer long-term promise, although they
are not ready for widespread application. Technologies such as hydrogen
power and fusion are currently being developed as new sources of
energy. While these technologies have the potential to deliver large
amounts of energy with fewer environmental impacts than traditional
energy sources, they cannot be counted upon to deliver significant
amounts of energy in the near future due to significantly higher costs
and technical challenges. To date, use of hydrogen fuel cells still
requires the extraction of hydrogen from another fuel source, such as
natural gas, and currently this extraction is too costly to compete
with other sources of energy. In addition, the infrastructure to
support hydrogen power has not been built. While fusion also may have
the ability to provide an abundant and clean energy source, research on
this technology remains at a very early stage.
We have issued several reports describing the viability and technical
progress of several renewable and alternative energy sources supported
by the federal government. A continuing theme of these reports has been
that when the government invests money into research and development
initiatives, it is important to keep one eye on the technical goals and
one eye on the marketplace. We have noted that the success of the
investment should be measured by its contribution to increasing the use
and feasibility of an energy source, rather than reaching specific
technical research and development goals. In forthcoming work requested
by the Congress, GAO will report on the impact of wind turbines on
birds and other aspects of the environment, as well as geothermal
energy development in the United States.
Key Questions:
* Should the federal government establish clear and measurable goals
for the development and use of renewable and alternative energy
sources, and, if so, how should progress toward these goals be measured?
* What should the federal government's role be in researching and
developing existing and future sources of renewable and alternative
energy sources?
* What are the costs and benefits of increasing our use of renewable
and alternative energy sources?
* What are the implications of renewable energy mandates for deploying
renewable energy technologies and for electricity markets?
Reducing Energy Demand through Efficiency and Consumer Choice: the
Often-Overlooked Energy Option:
Experts have long contended that energy strategies that reduce demand
can cost less, be brought on line faster, and provide greater
environmental benefits compared to strategies that increase the amount
of energy supplied--particularly if demand reductions decrease fossil
fuel consumption and related pollution. Such strategies include
improving the efficiency of energy we already use and allowing
consumers to choose when it makes the most sense to conserve energy.
Despite their advantages, however, opportunities to improve efficiency
and consumer choice are often overlooked.
Overall, energy demand in the United States has trended steadily upward
for the last 50 years. While demand has increased, the amount of energy
the country uses relative to its economic output has fallen. The amount
of energy used for each dollar of gross domestic product has dropped by
about half from 1970 through 2003. The reduction has been even more
striking when examining the industrial sector, where energy used per
dollar of GDP has fallen by over 60 percent since 1970. It is not clear
whether this reduction reflects a decrease in energy intensive
industries, such as aluminum and steel manufacturing, improvements in
energy efficiency, or some combination of the two.
The federal government has, periodically, made efforts to reduce
demand, encourage energy efficiency, or both. To reduce demand, the
federal government has, among other things, encouraged consumers to
voluntarily limit excessive heating and cooling of homes and to reduce
the number of miles that they drive. To encourage energy efficiency,
the federal government has established energy efficiency standards for
such things as home appliances, air conditioners, and furnaces, as well
as provided incentives for purchasing energy-efficient equipment. In
the transportation sector, the federal government has required
automakers to meet overall efficiency standards--known as Corporate
Average Fuel Economy (CAF—) standards--for the vehicles they sell. The
federal government has also made investments to improve energy
efficiency and save money on energy at its own buildings through the
Federal Energy Management Program and utilizing energy savings
performance contracts.
Federal efforts have met with some success. According to the American
Council for an Energy Efficient Economy and the Alliance to Save
Energy, energy efficiency investments made from 1973 through 2003 saved
the equivalent of 40 to 50 quadrillion BTUs of energy in 2003, equal to
about 40 to 50 percent of total energy consumption and more than any
single fuel provided. Several organizations, including a panel of
several national laboratories, estimate that many opportunities for
additional improvements in energy efficiency remain untapped.
At times, however, federal efforts to reduce energy demand and improve
energy efficiency have had to compete with efforts to keep energy
prices low. For example, residential and commercial sectors of the
economy have until recently been somewhat protected from price
volatility by regulated prices for electricity and natural gas and thus
have been less likely to reduce their consumption of these sources.
Moreover, inflation-adjusted energy prices have generally declined,
until recently. Reducing demand when prices are falling has been
difficult for several reasons. For example, because energy-consuming
equipment, such as air conditioners, furnaces, and lighting systems, is
generally costly to purchase and lasts many years, consumers do not
want to replace it unnecessarily. In addition, consumers are often not
aware of the energy inefficiency of their homes and businesses. Falling
energy prices have also made it more difficult to demonstrate the cost-
effectiveness of spending money to replace aging and inefficient
equipment, particularly for residential and commercial customers. In
contrast, when consumers face prolonged period of higher energy prices,
they are more likely to identify and adopt cost-effective strategies
for reducing their energy demand. For example, following prolonged
supply disruptions and price increases for gasoline in the 1970s,
consumers in the 1980s chose to purchase more fuel-efficient vehicles,
pushing up overall fuel efficiency averages nationwide. In the late
1990s the opposite has been true; relatively low prices for gasoline
have encouraged consumers to choose to purchase larger and less fuel-
efficient vehicles.
GAO has examined policies designed to reduce demand in electricity
markets, as well as efforts to develop more fuel-efficient automobiles.
In August 2004, we issued a report finding that electricity demand
programs that better link the electricity prices consumers pay with the
actual cost of generating electricity offer significant financial
benefits to consumers, improve the functioning of electricity markets,
and benefit the federal government by lowering its utility bills. In
March 2000, we reported on the Partnership for a New Generation of
Vehicles (which sought to develop a family sedan that could drive about
80 miles on a gallon of fuel) and found that the vehicle being
developed did not match consumer vehicle preferences and that
automakers would not be manufacturing such a vehicle for U.S. markets.
In forthcoming work requested by the Congress, GAO will evaluate the
Department of Energy's program for setting energy efficiency standards
for appliances.
Key Questions:
* What are the benefits and costs of potential federal efforts to
reduce energy demand?
* Are there economic, regulatory, or other barriers preventing the
adoption of cost-effective, energy-efficient technologies that could
meet consumer needs?
* Are there promising energy-saving technologies that are nearly cost-
effective that the federal government should consider encouraging
through the use of consumer incentives?
* Are there emerging energy-efficiency technologies that are past basic
research but that could benefit from federal and industry collaboration?
* Which technologies offer the greatest long-term potential for
reducing demand, and should they be considered for intensive federal
research?
* To what extent are retail price structures impeding the deployment of
cost-effective and energy-efficiency technologies?
Conclusions:
Given the increasing signs of strain on our energy systems and our
growing awareness of how our energy choices impact our environment,
there is a growing sense that federal leadership could provide the
first step in a fundamental reexamination of our nation's energy
policies. As the Congress, executive agencies, states and regions,
industry, and consumers weigh such a reexamination, we believe that it
makes sense to consider all energy sources together, along with options
to encourage more efficient energy use and consumer choices to save
energy. While a balanced energy portfolio is needed, striking that
balance is difficult because of sometimes competing energy,
environmental, economic, and national security needs.
Clearly none of the nation's energy options are without problems or
trade-offs. Current U.S. energy supplies remain highly dependent on
fossil energy sources that are either costly, imported, potentially
harmful to the environment, or some combination of these three, while
many renewable energy options still remain more costly than traditional
options. On the other hand, past efforts to reduce energy demand appear
to have lost some of their effectiveness in recent years. Striking a
balance between efforts to boost supplies from these various energy
sources and those focused on reducing demand presents challenges as
well as opportunities.
In the end, the nation's energy policies come down to choices. Just as
they did some 30 years ago in the aftermath of the major energy crises
of the 1970s, congressional choices will strongly influence the
direction that this country takes regarding energy issues--affecting
consumer, supplier, and investor choices for years to come. Consumer
choices made from today forward will determine to a great extent how
much energy will be needed in the future. In the same way, energy
suppliers have choices about how much of each type of energy to
provide, based increasingly on their interaction with competitive
domestic and sometimes global markets for energy. Choices made by
consumers and suppliers will be influenced by state and local entities,
along with regional stakeholders in some areas of the country, which
have authority over key decisions that affect such things as the siting
of generation and transmission facilities as well as access to their
lands. Similarly, investors have choices regarding where to invest
their money, whether in new power plants, refineries, research and
development for new technologies, or outside the energy sector all
together. Yet, many of these choices may be significantly influenced,
or even overshadowed, by broader forces that are beyond our control,
such as expected energy demand growth in the developing world.
In closing, providing the American consumer with secure, affordable,
reliable, and environmentally sound energy choices will be a challenge.
I would like to note that more than 30 years ago, during the first
energy crisis, our nation faced many of the same choices that we are
confronting today. How far have we come? Have we charted a course that
can be sustained in the 21st century? In 30 years, will we again come
full circle and ask ourselves these same questions about our energy
future? The answer to this final question lies in our collective
ability to develop and sustain a strategic plan, with supporting
incentives, along with a means to measure our progress and periodically
adjust our path to meet future energy challenges.
I would be pleased to respond to any questions that you, or other
Members of the Subcommittee, may have at this time.
Contact and Acknowledgments:
For further information about this testimony, please contact me, Jim
Wells, at (202) 512-3841. Contributors to this testimony included
Godwin Agbara, Dennis Carroll, Mark Gaffigan, Dan Haas, Mike Kaufman,
Bill Lanouette, Jon Ludwigson, Cynthia Norris, Paul Pansini, Ilene
Pollack, Melissa Roye, Frank Rusco, and Ray Smith.
[End of section]
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FOOTNOTES
[1] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[2] Capacity factor is the ratio of electricity generated to the amount
of energy that could have been generated if the plant ran every hour of
every day in the year.