Role of Gove^ment in Energy RD&D

What is the proper role of gove^rnment in energy RD&D? Let us focus primarily on the RD&D process as a whole, classic R&D and demon­stration, recognizing at the outset that there is probably no simple answer to the question, and that the DOE renewable energy program, which served as our background, was somewhat atypical.

Where the gove^rnment is the sole or primary customer, such as has been the case for defense technology or throughout much of the history of our space program, strong arguments can be made that government should lead the RD&D efforts, both in funding and performing the actual R&D at national laboratories. Even in these two RD&D arenas, how­ever, the private sector conducts the lion’s share of federally funded RD&D in its own facilities and manages many of the national labo­ratories under gove^rnment contract. With the proposed privatization and commercialization of some space capabilities and the increasing impor­tance to the defense industry of overseas weapons sales, the “government as primary customer” role has become blurred. And in the Industry R&D program, the government leverages its funds and permits industry to be more responsive to downstream government needs, further reinforcing the importance of the private sector. For defense and space, demonstration (fly before you buy) is the equivalent of providing a near-commercial product to the customer, in this case the government, because it leads directly to major gove^rnment buys and utilization.

Is there an analogy between defense and space RD&D and energy RD&D? The answer, unfortunately, is yes and no. Federal funding for energy supply technologies RD&D, as we have seen in the earlier chap­ters, has a long history. If we include in the federal energy role other activities such as tax incentives and regulation, the government has been a controlling influence as both funder and doer, certainly in the last fifty years. In tins respect, then, the analogy is good, especially for nuclear energy RD&D. However, if we look at the gove^rnment as energy tech­nology customer, the analogy is bad. Although a major customer, the gove^rnment is neither the sole nor even the dominant customer. Because the government fails this last test, strong arguments were made during the Reagan administrations against the value of government participation in any energy RD&D program, except basic research.

To rationalize and consolidate gove^rnment’s role in energy RD&D in the mid-1970s, a period of perceived national crisis caused by widespread concern over temporary energy shortages, the finiteness of fossil energy resources, and the need for secure supply, ERDA was formed. There was strong logic for this move because the government’s programs, right or wrong, were highly fragmented, and the tradition of gove^rnment leader­ship in nuclear energy RD&D was deeply ingrained in the thinking of most decision makers. ERDA’s objective and guiding philosophy was that the government, with the help of industry, would develop on a pilot scale a number of new energy supply technologies that industry could not or would not develop on their own, and put them “on the shelf” until the nation (read “energy industry”) needed to use them. In this philosophy, the demonstration phase (pilot plant) concluded gove^rnment’s role; com­mercialization would be left to the private sector. This was a new and interesting concept proposed by a pro-private sector, Republican admin­istration, and never before attempted on such a large scale.

ERDA never had the opportunity to carry out its objective. In ERDA’s short, two-plus years of existence, good progress was made in bringing several technologies toward pilot plant demonstration, but events beyond its control overtook the programs. With hindsight, one could easily argue that the objective would never have been achieved, or if achieved, that the technologies probably would have languished “on the shelf” through obsolescence or lack of industry interest. Furthermore, government man­agers lacked the necessary background and understanding to properly respond to the economics of a highly complex marketplace, the driving force for the application of new energy technologies.

The elections of 1976 changed the energy field completely. With the new energy philosophers brought to Washington by the Carter admin­istration, government’s role was to be greatly expanded for a sector of the economy that is, arguably, the most complex. This complexity is created because energy encompasses all segments of gove^rnment at all levels, the private sector at all levels, and the public at large. From taxes to regu­lation, federal power marketing, federally owned dams, federally owned oil reserves, the growing strategic petroled reserve, public and private utilities, interstate pipelines, large and small oil and gas producers, refiners and distributors, builders and developers, to the gas station on the comer, the energy sector is involved in all aspects of our life. To place all these varied activities under the purview of one huge government bureaucracy, DOE, was a mon^ental undertaking, the magnitude of which was not fully recognized by its initiators. Once again, the perceived crisis resulted in an action undertaken with bipartisan support that would have long-lasting consequences.

DOE, first proposed by President Ford and established by President Carter, attempted to break new ground, in particular by intervening in the private energy sector through price regulation, mandatory purchasing agreements, expanding tax incentives and accelerated commercialization of new energy supply technologies in addition to traditional support of RD&D. These actions built on a legacy of activist initiatives supported by a series of sweeping laws enacted by the 93rd and 94th Congresses and resulted in many positive accomplishments, especially in the field of renewable energy. Most of the policies implemented by the Carter administration were short-lived and had little long-term impact; instead, the problems they created reinforced the perception that government intervention in the energy sector was a mistake. Most of the actions taken during the Carter administration were overturned by its successor.

The Reagan administration, in reaction to the Carter policies, and hearkening back to the philosophical approach of the early Nixon years, espoused limited gove^rnment participation in only high-risk, cutting edge R&D that the private sector would be reluctant to undertake or unable to afford, and began to phase out all demonstration programs. RD&D budgets at DOE were slashed, especially for renewable energy, and notice was given that DOE itself would be eliminated. But once again, even this constrained and flawed definition of government’s role proved untenable. Congress refused to cooperate. Industry was of two minds. While gradu­ally reducing in-house research during the past twenty years, industry still conducts some high-risk R&D, especially where potential end products would be critical to long-term, competitive positions. However, the energy industry looked to the government to subsidize energy RD&D. And for renewable energy technologies, some form of “leveling the play­ing field” with conventional energy supplies was considered essential by Congress because solar energy systems were still not economically com­petitive without it. The Reagan administration took the position that there was no shortage of conventional energy and, therefore, the market­place would sort out any supply inequities. As it turned out, this position was correct: the actual price of energy fell over the next eight years.

The Reagan administration approach, primarily deregulation, led to lower energy prices in the short term but did not address the longer-term nagging problems of what if the demand for oil continued uncontrolled and the OPEC cartel and other foreign oil and gas producers were to reduce supply to importing nations. The approach also did not take into account the growing environmental concerns over buurning fossil fuels and utilizing nuclear energy. With a Democratic Congress controlling the purse strings and favoring a more active gove^rnment role, an uneasy truce resulted. DOE survived, and the constrained definition of gove^rnment’s role in energy RD&D eased. Gove^rnment’s role in commercialization, however, was eliminated, and the support of regulations, tax incentives, and other forms of government intervention espoused by the previous administration also disappeared. Tax incentives for the solar industry, for example, were permitted to lapse.

But inconsistencies continued as to which supply technologies would be favored under this constrained approach. Following the administration’s lead, DOE’s R&D budgets in the 1980s for conventional energy (oil and gas, coal, and nuclear energy) once again became predominant. Solar energy took a back seat, and the playing field tilted once more in favor of conventional energy. There was, of course, an immediate impact on the solar industry; sales decreased and many companies went out of business. The bright spot was that energy conservation, or the efficient use of energy, which was often closely allied to renewables, remained an accepted practice by industry and consumers, even without large DOE budgets attempting to influence the marketplace. The bottom line still controlled: money could be saved through adoption of energy efficiency techniques. Gove^rnment’s role in furthering energy conservation is marked by both successes and failures. Corporate Average Fuel Economy (CAFE) standards, for example, were a success; energy performance standards for buildings were not. The impact of government RD&D on conservation is hard to assess; conservation RD&D budgets were never large. Highlighting the benefits of energy conservation through public awareness announcements linked to government programs was certainly important. Mandated, automobile fuel efficiency is probably where gov – e^rnment actions had the greatest positive effect in transforming the mar­ketplace, although government RD&D did not supply the technology that made this possible. The public at large got the message and expected the auto industry to market fuel-efficient vehicles.

How does gove^rnment RD&D affect the energy marketplace? First, it is important to recognize that changes in how the economy uses different types of energy are evolutionary, not revolutionary. The widespread adop­tion of each new energy source, from wood b^rcing, to coal, to oil and gas, took place over periods of fifty years or more. Accomplishing the widespread adoption of nuclear energy in only twenty years is perhaps the only gove^rnment success story, depending on your outlook. Some gove^rnment-sponsored nuclear energy programs such as the terminated breeder reactor and fusion energy have not come close to application, in spite of more than twenty years of large-scale, gove^rnment-funded RD&D. Synthetic fuels and oil shale are two other examples of failed gove^rnment programs; billions of taxpayer dollars went into these tech­nologies, thus far with no contributions to the nation’s energy economy. And although major progress was made in reducing solar energy systems costs via the government-funded solar or renewable energy programs, the overall impact of solar technologies on the marketplace has been small. The lesson is, even though the fifty-year cycle is not complete, it is hard for government-supported, energy-related RD&D to make a major impact, even with strong private sector involvement.

The authors ^raly believe there is a role for gove^rnment in energy RD&D. The question is, how should it be pursued? Although the jury is still out on its success, and renewable energy advocates might object to its promotion, DOE’s Clean Coal Program may be the best example, to date, of how gove^rnment and industry can work together effectively on energy technology. Underway for the past seven years, the Clean Coal Program is aimed at demonstrating advanced technologies that will result in the more efficient and cleaner burning of the nation’s largest fossil fuel resource. The utility industry, is now building or retrofitting power plants based on the technology developed and, in addition, beginning to take the technology overseas, providing a double dividend of new business and reduced environmental impact for energy-starved countries. The cost of the program to taxpayers has been approximately $2.58 billion, with the private sector contributing approximately 65 percent of the cost of the demonstrations. That industry has been willing to ante up its own funds to the tune of more than $4.5 billion would seem to confirm their belief that something worthwhile will come from this partnership. Certainly industry cost-sharing has been higher in this program than in any other energy demonstration program.

Would these advances have been made without the government partic­ipation? Probably not, certainly not as quickly. Are the results worth the dollars spent? Again, the jury is out, but the prospects are encouraging. Early renewable energy demonstrations typically required little or no industry cost-sharing, which undoubtedly contributed to the lack of suc­cess in the commercialization of renewable energy technologies. If one agrees that the Clean Coal Program is an example of the successful pur­suit of new energy technology by the gove^rnment, how did it happen? The answer is partnership—gove^rnment funds and expertise matched by the private sector, driving toward goals mutually agreed on, not dictated by the government. In recent renewable energy programs, this lesson has been learned. Both the photovoltaic manufacturing automation technol­ogy program and the Utility Photovoltaic Group demonstration program are based on strong government-industry partnerships.

Such an approach is not new. The most successful of such R&D part­nerships was that begun in 1915 between the gove^rnment’s National Advisory Council on Aeronautics (NACA; later the foundation of NASA) and the nascent aircraft industry. Starting on a small scale, the NACA programs evolved into major programs and national laboratories with state-of-the-art facilities and bright, cooperative staffs. Everyone in the aircraft industry would agree that the results of that partnership ena­bled U. S. industry to take and maintain the lead in aviation technology and aircraft sales worldwide.

Although the first successful heavier-than-air flight in 1903 was accom­plished by the Wright brothers without government support, many Euro­pean countries were vigorously pursuing this technology at a national level. Mter the Wright brothers’ flight, most of the technology advances in the next fifteen years were made in Europe, from better engines to better materials and airframe design. The NACA-industry partnership reversed this trend, and within twenty years, U. S. industry was ahead to stay.1 The recently passed General Agreement on Tariffs and Trade (GAIT) will undoubtedly have an effect on how such future partnerships will be structured, but our foreign trade competitors may nevertheless find a way to continue their long-established close government-industry rela­tionships. To stay competitive, not just in the energy area, continuing partnerships modeled after the Clean Coal Program and NACA/NASA must be maintained and improved upon to assure successful investments in RD&D. At the very least, if the gove^rnment is to sponsor energy

RD&D, the public and Congress must be prepared to set their sights on the long haul.

Most would accept gove^rnment involvement in basic and applied research as justified and appropriate. Even the Reagan administration, while attempting to impose across-the-board draconian cuts in govern­ment-sponsored R&D made an exception of these areas. Future advances in energy technology will be driven by new discoveries in materials science. All energy systems improvements, regardless of fuel or energy source, will be dependent on finding less costly materials by which a Btu or kilowatt can be delivered to the end user. Materials research is an especially attractive target for gove^rnment-sponsored R&D, and perhaps the most cost-effective. Such research reqU:res dedicated, sophisticated laboratory facilities and personnel. These resources exist today in our national laboratories. The taxpayers’ investment in these laboratories, accumulated over decades, should be realized by assigning them the pri­mary mission of conducting materials research. This research should be performed with industry in a carefully structured collaborative program driven by industry’s perception of need.

Demonstration is probably the most difficult phase of RD&D to define in terms of the proper government role. Because pilot or prototype dem­onstrations to prove a new technology, although important, are usually costly and can also lead to dead ends, this critical phase must be carefully planned and executed. When industry determines a technology is ready for demonstration, the best approach will be to let it provide the motiva­tion and take the lead supplying the majority of resources, as we have seen for the Clean Coal Program. Depending on the type of demon­stration, the government role could differ markedly and should be jointly agreed upon by all the stakeholders. Inevitably, gove^rnment-industry RD&D partnerships will be required to bring new energy technologies to the marketplace, not just renewable energy technologies. How govern­ment responds to that need should be predicated on the many lessons learned, some documented here.

Finally, a few thoughts on the gove^rnment’s fitful role in commerciali­zation of renewable energy technologies. In the 1930s only the government could have undertaken the building of the many high dams for hydro­electric power—the single, successful example of gove^rnment “commer­cialization” of renewable energy on a large scale. And in the 1950s only the gove^rnment could have taken the lead in advancing nuclear technol­ogy to the point where utilities could bring nuclear reactors onto the grid.

Using these two examples as a guide, gove^rnment programs initiated in the late 1970s to support commercialization of renewable energy tech­nologies seemed logical and useful in spite of obvious differences in the technology and applications. Renewable energy projects, by their very nature, lend themselves to relatively small-scale, dispersed applications. For solar heating and cooling, we are often looking at single buildings or small groups of buildings. Solar thermal plants seem to scale best at a size of a few hundred megawatts. It follows that, although capital costs may be high for renewable energy, per Btu or kilowatt delivered, the overall project costs are small when compared to typical, central power gen­eration. Thus, when a renewable energy technology is competitive in all aspects for a given application, financing and management can easily be undertaken by the private sector. The gove^rnment’s role in commerciali­zation should be to move the energy market toward prices based on total societal costs of energy, as previously discussed in section 8.2.

In view of the above, the authors continue to support government – industry partnerships for renewable energy RD&D; we believe that gov – e^rnment has a critical policy role in rationalizing energy prices, and an important, but limited, role in the purchase of commercial systems, based on total societal costs. The maintenance of effective government-industry partnerships in RD&D requires continuity of goals, direction, and man­agement. Energy research requires skilled managers and researchers, resources, and most importantly, time. As our national research capa­bilities are presently structured, support of energy research by the national laboratories will be instrumental in bringing new technologies to the fore. Their facilities and technical staffs are not duplicated in the private sector; all that is needed is a clear-cut mission. Coordination and dissemination of research results to all interested parties, restricted only by proprietary rights, is another important and perhaps unique gove^rnment function that will speed the pace of development. Eventually, development will require a vision of future markets and a commitment to making a profit through long-term provision of quality products and services, best done in the private sector, with technical and financial support of gove^rnment.

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