oversight

Energy Policy: DOE's Policy, Programs, and Issues Related to Electricity Conservation

Published by the Government Accountability Office on 1997-04-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                    ,i ..     i,.


      United States
GAO   General Accounting  Office
      Washington, D.C. 20548

      Resources, Community,   and
      Economic Development    Division

      ES-276443



      April 9, 1997


      The Honorable John R. Kasich
      Chairman, Committee on the Budget
      House of Representatives

      Subject:    Energv Policv: DOE’s Policv. Programs, and Issues Related to
                  Electricitv Conservation

      Dear Mr. Chairman:

      As requested, we are providing you with information on the Department of
      Energy’s (DOE) energy policy and programs as they relate to electricity
      conservation. We used this material to brief your office on March 20, 1997.

      As a component of the administration’s overall sustainable energy strategy,
      DOE integrates electricity efficiency into its energy-efficiency and renewable-
      energy policy and programs. However, neither the administration nor DOE has
      an explicit electricity conservation policy. For fiscal year 1998, the
      administration requested a budget for DOE’s Office of Energy Efficiency and
      Renewable Energy of about $1.02 billion, which represents a 27-percent
      increase over the Office’s appropriation for fiscal year 1997.

      In the recent past, the Congress passed legislation to facilitate greater
      competition among wholesale suppliers of electricity. Currently, the Congress
      is considering, and several states have passed, legislation that would
      restructure the electric utility industry to facilitate greater competition among
      retail suppliers. Restructuring may result in lower electricity prices, on
      average; thus, some consumers may be3ess willing to invest in energy-
      efficiency technologies. If electricity prices are lowered and consumption and
      generation subsequently increase, restructuring could possibly lead to greater
      power plant emissions and affect environmental quality. At this tin-te, it is
      uncertain whether DOE’s current energy-efficiency and renewable-energy
      programs are the most cost-effective means for addressing environmental
      damages.

                                                  GAOBXED-97-107R   Electricity   Conservation
B-276443

Enclosure I provides you with background data, information on DOE’s policy
and programs, and our preliminary thoughts on the consistency of DOE’s
current policy and programs in the light of current and anticipated changes in
economic conditions and public policies.

We reviewed the National Energy Policy Plan’ and DOE.‘s statements regarding
the Department’s current energy policy and programs. In addition, we
reviewed the literature on energy policy and consulted with several experts.
We performed our review from December 1996 through March 1997 in
accordance with generally accepted government auditing standards.

AGENCY COMMENTS AND OUR EVALUATION

We provided DOE with a draft of this report for review and comment. DOE
said that (1) our report fails to accurately reflect the proven value and cost-
effectiveness of the programs and policies of the Office of Energy Efficiency
and Renewable Energy and (2) DOE’s policies and programs are among the
most cost-effective options for addressing the environmental damages
associated with an increase in the demand for electricity services arising from
the restructuring of electric utilities.

We believe that the cost-effectiveness of DOE’s programs in addressing the
environmental damages that may result from the restructuring of the electric
utility industry will depend to a great extent on how restructuring unfolds and
on the path of future electricity prices. Thus, it is uncertain whether DOE’s
current programs will reduce additional environmental darnages in the most
cost-effective way. Even if DOE’s current projections were to indicate that the
estimated benefits of the Department’s programs exceed their costs, possible
alternative programs or measures might provide equal or greater environmental
benefits for less cost.

DOE also commented that our audits and analysis have shown that DOE’s
Office of Energy Efficiency and Renewable Ener,sy’s programs and policies are
among the most cost-effective ways of addressing environmental concerns.
However, we have never reported that DOE’s programs and policies are among
the most cost-effective ways to address environmental concerns. Enclosure II




‘Sustainable Energy Strategy: Clean and Secure Energy for a Competitive
Economy, Pursuant to Section 801 of the Department of Energy Organization
Act (U.S. Government Printing Office, July 1995).
 2                                         GAOIRCED-97-107R Electricity   Conservation
B-276443

contains the complete text of DOE’s comments, along with our detailed
responses.



We will make copies of this report available to others upon request. If you
have any questions or need additional information, please call me at (202) 512-
3841. Major contributors to this report include Charles W. Bausell, Jr.;
Timothy J. Guinane; Michael J. Wargo; and William K. Garber.

Sincerely yours,




Victor S.‘Rezende
Director, Energy,   sources,
 and Science

Enclosures - 2




                                         GAO/RCED-97-107X   Electricity   Conservation
                                                            ENCLoSURE        I   :,:‘7’
ENCLOSURE I


                 ELECTRICITY CONSERVATION




MO     RESOURCES, COMMUNITY, AND
       ECONOMIC DEVELOPMENT DIVISION


        ENERGY POLICY

        DOE’s Policy, Programs, and Issties
        Related to Electricity Conservation




 4                                 GAOLEtCED-97-107R Electrici&   Conservation
ENCLOSURE I                                                                     ENCLOSURE I




GM     Background

      Demand for Energy Is Increasing

           0 Total energy consumption was up by
             36% during 1970-95; is expected to
             grow by 1% annually during
             1995-2015.




      Source: GAO’s analysis of data from the Energy Information Administration (EIA).




5                                                     GAOIRCED-97-107R Electricity   Conservation
ENCLOSUREI                                                                                                           ENCLOSURE1




GM           Background

     Index,19704
                                          Use of Energy per GDP Is Declining
     1.2 -
                                          Actual                                                   Forecast

      1



     0.8 -
                                             --..
                                                    . ..-----._.._.__.....-..-.-.

     0.6 -



     0.4 -


     0.2 -


                                      I               I                I
       0     ’
           1970        1975        1980             1985           1990             1995    2000      2005    2010        2015

           -      Per capita
           ----   Per dollar of gross domestic product (GDP; energy intensity)
           Index is the ratio of energy use per GDP or capita; 1970 value equals 1.
           Source: EIA.




6                                                                                          GAO/RCED-97-107R Electricity      Conservation
ENCL~SU~~EI                                                             ENCLOSURE1




CA* Background

      Demand for Electricity Is increasing
       l Electricity sales were up by 116%

          during 1970-95; are expected to grow
          by an average of 1.5% annually
          during 1995-2015 for all sectors.
       l Although small as a proportion    of total
          sales, electricity sales to the
        - transportation sector are expected to
          grow by 11.4% annually during
          1995-2015.
      Source: GAO’s analysis of EM’s data.




                                             GAO/RCED-97-107R Electricity   Conservation
ENCLOSURE I                                                                                            ENCLOSURE I




GAO Background

                               Electric         Utilities’    Fuel Source    Is Changing




                     16.1%                  6.1%                                               22.4%
                                1974                                                    1995

                         17 Coal    q Natural Gas 1 Petroleum k!fdNuclear q Renewable
Data are a proportion of total net generation    (excludes plant use).
Source: GAO’s analysis of EM’s data.




 8                                                                          GAOLRCED-97-107R Electricity   Conservation
ENCLOSURE I                                                                                      ENCLOSURE I




GQ             Background

                                Electric      Utilities’ Fuel Source     Is Changing




                                                            1.8%
                                                         2015
                                                        Forecast

                         q Coal q Natural Gas n Petroleum q Nuclear ‘@ ifiRenewable
Forecast data are a proportion of total generation.
Source: GAO’s analysis of EM’s data.




9                                                                      GAO/RCED-97-107R Electricity   Conservation
ENCLOSURE I                                                                                                     ENCLOSURE1         -




GAf> Background

Short Tons (thousands)        Sulfur Dioxide            Gas Emissions                Are Declining
25,000


20,000
                               15,426


15,000
                                                                                                            8,950

10,000


  5,000


       0
                          1985
                                 Actual                                                          Forecast
Electric utility emissions; forecast is the limit mandated   by the Clean Air Act
Amendments of 1990.
Source: EIA.




 10                                                                                 GAO/RCED-97-107.R Electricity   Conservation
ENCLOSURE I                                                                                              ENCLOSURE I




MCI Background

Metric Tons (millions)                Carbon Emissions                Are Increasing



  800                                                                                                  678.1
                                                                                  626.4


  600
                         418.3

  400


  200


     0
                    1980
                                                 Actual                      Forecast
Actual data are for carbon emissions from electric utilities; forecast includes
emissions from all electric power generators except cogenerators.
Source: EIA.




11                                                                            GAO/RCED-97-107R Electricity     Conservation
                                                                              _’ :.

ENCLOSURE I                                              ENCLOSUliE I




MYO Background

       Competition    in the Utility Industry Is
       Increasing

         l  Public Utility Regulatory Policies Act
            of 1978.
          l Energy   Policy Act of 1992. -
          l Federal Energy Regulatory
         - Commission’s Order Nos. 888 and
            889 (1996).
          l Current  federal/state efforts.




 12                             GAO/RCED-97-107R Electricitg   Conservation
ENCLOSTJREI                                                                    ENCLOSURE I




MCI Background

       Prices for Electricity Are Changing
          Average retail price declined by 26%
          during 1982-95.
           EIA and Gas Research Institute
          project annual declines in residential
          electricity prices of 0.5% and 1.2% ,
          respectively, during 1995-2015.
          WEFA projects annual increases in
          electricity prices of 0.4% per year
          during 1995-2015.
       Prices are adjusted for inflation. WEFA is a forecasting service.
       Source: GAO’s analysis of EIA’s and Gas Research Institute’s data; WEFA.




13                                                  GAO/RCED-97-107R Electricity   Conservation
ENCLOSUREI                                             ENCLOSURE1




MO     DOE’s Energy Policy

       The administration and DOE integrate
       electricity efficiency into a broader
       energy policy.

       Neither the administration nor DOE has
       an explicit electricity conservation policy.

       Energy-efficiency and renewable-energy
       programs are the DOE programs that are
       most related to conservation.




 14                            GAO/RCED-97-107R Electricity   Conservation
ENCLOSURE I                                             ENCLOSURE I




MO     DOE’s Energy Policy


       DOE’s energy-efficiency and renewabie-
       energy policy and programs
        l involve a range of energy sources

          and end-users
        l involve programs   (e.g., electric
          vehicle research and development
          (R&D)) that could result ip an
          increase in the use of certain energy
          sources (e.g., electricity) and a
          decrease in the use of other sources
          (e.g., petroleum).




15                           GAORCED-97-107Ft Electricity   Conservation
ENCLOSURE I                                              ENCLOSURE I               ‘.-




GM     DOE’s Energy Policy

       The objectives of DOE’s energy-
       efficiency and renewable-energy policy
       and programs include
         l improving    energy productivity and
            strengthening the economy,
         l cost-effectively  preventing pollution,
         l reducing   U.S. vulnerability to global
            energy shocks,
          l lowering the cost of emerging

            technologies, which helps firms to
            compete overseas,




                                                                              .-
 16                             GAO/RCED-97-107R Electricity   Conservation
ENCLOSURE I                                               ENCLOSURE I




C&W DOE’s Energy Policy


       DOE’s rationale for policy and programs
       includes market failures, which lead to
       inefficient resource allocation, such as
         l the failure of energy markets     to
           account for external environmental
           degradation costs associated with
           energy production and use
        -0 the private sector’s inability to profit
           sufficiently from investments in R&D
           involving electricity infrastructure and
           energy-efficient technologies,




                              GAOIRCED-9’7-107R Electricity   Conservation
ENCLOSURE I                                            ENCLOSURE I




GM     DOE’s Energy Policy

       DOE also identifies market barriers that,
       according to DOE, inhibit cost-effective
       investments in efficient technologies and
       practices, such as the
         l lack of customer  incentives to adopt
           economical energy-saving measures;
         l strong tendency   of home builders and
        - buyers to minimize up-front costs;
         l absence of credible data regarding

           the performance and cost of energy
           technologies;




                              GAOAZCED-97-107R Electricity   Conservation
ENCLOSURE I                                               ENCLOSURE I




GM     DOE’s Energy Policy

         l fragmentation of the home-building
           industry, which impedes large-scale,
           industry-sponsored R&D;
         l long life-times of residential structures
           and energy systems, which inhibit the
           incorporation of new more -
           energy-efficient technologies;
         1)lack of building management’s
           attention to energy costs due to fact
           that energy costs are a small fraction
           of business expenses.




19                              GAO/RCED-97-107R Electricity   Conservation
  ENCLOSURE I                                                 ENCLOSURE I




 GAY Selected DOE Energy Programs


Energy-Efficiency and Renewable-           FY 1997                   FY 1998
Energy Budget Categories                Appropriation                Request
                                            (000)                     (000)
I, Energy conservation
    (a) R&D                                   $419,917              $516,600
    (b) Building technology, state             149,845               191,100
       and community-sector grants
2. Solar and renewable resource                269,952               342,500
   technologies     -
  Prior-year balances and adjustments           -38,932               -35,000
                   Total                     $800,782               $1,015,200




   20                                GAO/RCED-97-107R Electricity    Conservation
   ENCLOSURE I                                                    ENCLOSURE I




  w       Selected DOE Energy Programs
                                 \

Budget Categories          Examples of                                   FY 97
                           Programs/Activities                          Enacted
                                                                         (000)
(1) Energy conservation    -Electric vehicle R&D                         $17,820
(a) R&D                    -Motor challenge                                5,150.
                           -Lighting and appliance                         6,902
                           R&D
(b) Building technology,   -Weatherization assistance                     120,845
state, and community-      -State energy program                           29,000
sector       -
(2) Solar and renewable    -Geothermal                                      30,000
resource technologies      -Biofuels energy systems                         55,300
                           -Photovoltaic energy sys.                        60,000




   21                                  GAOLRCED-97-107R Electricity   Conservation
ENCLOSURE I                                             ENCLOSURE I




MCI DOE’s Views on Energy Policy and
    Programs
     DOE views its policy and programs as
     consistent with current and anticipated
     economic conditions and public policies
      l Federal R&D funding and deployment

          activities are needed to mitigate the
          lack of private sector funding.
       l Whether prices rise or fall, efficiency

        - investments are needed to maximize
          energy productivity and offset
          environmental degradation.




                               GAOLRCED-97-107R Electricity   Cckservation
ENCLOSURE I                                             ENCLOSURE I




GACI Preliminary Thoughts on Energy Policy
     and Programs
       DOE identifies market barriers that inhibit
       cost-effective investments in efficient
       technologies and practices.
         l Eliminating market barriers may not
           lead to more efficient resource
           allocation.
         l It is uncertain whether DOE’s
           programs to eliminate market barriers
           are the most cost-effective means for
           addressing the environmental costs of
           energy production and use.




23                            GAOLRCED-97-107R Electricity   Conservation
ENCLOSURE I                                             ENCLOSURE I




GM     Preliminary Thoughts on Energy Policy
       and Programs
       Restructuring may result in lower
       electricity prices, on average, and
       possibly higher emissions of pollutants
       from a subsequent increase in
       consumption and generation.
         l At this time, it is uncertain Whether

           DOE’s programs are the most
           cost-effective way to address the
           environmental degradation costs
           associated with an increase in the
           emis.sions of pollutants.




24                             GAO/RCED-97-107R Electricity   Conservation
ENCLOSURE I                                              ENCLOSURE I




MO     Preliminary Thoughts on Energy Policy
       and Programs     ’
       Even though, on average, electricity
       prices may fall, restructuring may result
       in higher prices during peak demand
       periods. During these periods,
       consumers would likely use less
       electricity and adopt more
       energy-efficient technologies. Thus,
       restructuring may facilitate the adoption
       of energy-efficient technologies by some
       households and businesses.




25                            GAO/RCED-9’7-107R Electricity   Conservation
ENCLOSURE I                                            ENCLOSURE I




w      Preliminary Thoughts on Energy Policy
       and Programs
       In a restructured and more competitive
       energy market, investor-owned utilities
       may be less likely to sponsor R&D.
          l The private sector alone may

            undersupply investments in certain
            types of R&D, such as the
            electricity-related infrastructure.
        - l It is unclear what other types of R&D
            investments may be undersupplied by
            the private sector.




26                            GAO/WED-97-107R   Electricity   Conservation
 ENCLOSURE II                                                                                         ENCLOSURE II
                     COMMENTS FROM THE DEPARTMENT OF ENERGY

 Note: GAO’s
 comments
 supplementing
 those in the                                              Department       of E-y
 report’s text                                                  Washington,0C 2G5435
 appear at the end                                                                                                           ,..._
                                                                                                                                     -’


 of this appendix.
                          MEMORANDUM                                                                            3iw&‘i6,   1997
                                                                                                   /-----.--‘
                          TO:




                          From:

                          subject:       Corrnnen~ on GAO Report on I3ectric;ty Conservation Policy




                          We request that the foIlowing general comments be included in the letter &om Mr. Rczfzndes 10
                          Mr. Wch in the section set aside fiK “agency comments.” If thegenmal unnmen~s art not
                          inclu&d in this section. the Department would consider this a serious breach of GAO’s
                          obtigatian t<J f.~rCscnt a&?nCy ViC~pofntS.

See comment 1.                    The W S Department of Enera believes that the report fails to acamtely refkza the
                                  px~von value and cost4ktivcness of the programs and policies of the Of&e of En=
                                  ISk$ncy and Renewable Energy (EELS). Many asscrtiow are unfwnded and lack
                                  substantiation.
                                     *   iiERE’s progams and policies am among the most cost&ve     ways of
                                         addressing environmental co-     as evidenced by GAO’s own audits and
                                         UlidjSiS.


                                     *   The report question’s whether EERE’s programs axe wst-e&ctive    even though
                                         an an&& conducted by Lhe GAO ttcelfsbows that the cost savinys to
                                         consumers from only two ‘LTEREprograms is gvaatcf than the entire research and
                                         &?Ve10pmen1ill&l     OTEERE oyef the y&U-s 1978 :o 1396 (see alfacbcd rabJe>

                                     *   By inacarrarclv scveriug the link betsvcen market tihuerr and marlcet barriers in
                                         the @XfUlW         ‘s @icy rationale, the -II u&Gly criticizes the Depertmcnt’s
                                         policy of removing     mark& btiers ia mcrgy efficiency invesfinents. In fiq
                                         EJZRE *o&s lo remove mark& liarriar to v            efliciency invcsbmeats in
                                         order to addrus rhe man& failvn of extend efkrmmentiil costs delacuicity




27                                                                GAOLRCED-97-107R          Electricity     Conservation
ENCLOSTJRE II                                                                                  ENCLOSURE II




                             p~n%~ction and use.

See comment 2.       t       The report prematurely queslions the ef%cacy of EERE’s programs in a
                             restructured ekctricity industry for tic following reasons:

                                    - Becauseekctric industry r&xucturing is still in its formative stages, it
                                    is prematorc to spewlate on what the ultimate effect of rcstnrcturing will
                                    be or exactly how the Department’s progams will need to adapt

                                    - No evidence is citcdto indicate why tbe problcrn ofsub-optimaf privae
                                    research and development will disappear once the eleceicity industry iu
                                    res3ructured.

                                    -- In the long term, refail ahxtricity prices will be important in
                                    determihing whether corsumers will invest in cuagy e5ciency. On the
                                    one hand, if eiectrkity prices rise, then energy &ciency will be even
                                    more needed to maximLe our Nation’s cntrgy productitity to fuel our
                                    economy. On the other hand, if electr;ci~ prices dalinc and dectrkity
                                    consumption increases, energy efficiency investments will be needed to
                                    OEW the environmental degradation caused by an increase in electricity
                                    generation. Under say scmatio, energy eEir5~~1~ investments will be
                                    needed to improve our Nation’s energy productivity. prevenl pollution,
                                    keep America secure, and ettg8ge the international market. Indeed, thcsc
                                    investmeals will became increasingly important as the international
                                    cormnunit)r moves to meet the challen&of climate change.
See comment 1.
                     These general comtncnts art: discussed in more detail in 3 memos from DOE 10 the GAO
                     dated March 25, 1997. February l&1997,        and Januarj~29,1997.




See comment 1.   l
                     0~ page 1 ofthe cover letter afli4r. Rczendesto Mr. Kasich, tbc fonotig         smemcm     is
                     made:

                             lf’deotricity prices are !owcrcd and corwmption and genemtion subscquentty
                             itmcax, rtirucnring      could possibly lead to greater power plant emissions and
                             atfcd environmcztal quality. At this time, it is uncertain whether DOE’s current
                             eneqpzffiaency and rcnewable~              programs are tbc nxxt cus%effkczivc
                             means fur impwry       fzntiotunelit83 quatity.

Now on p. 24.        On page 23 of the report. a similar statement is made. Both of these rtatemtnts sho~ti
                     be deleted or repkced becausehey unfairly question whether W’s        programs are
                     cost-cffmtive withod air’       a reason why or what aknative might be more WS-
                     effective. in f&t, hased on a study conducted by the GAO itself, it would be

                                                               2




28                                                           GAOLRCED-97-107R Electricity                Conservation
ENCLOSURE II                                                                                  ENCLOSURE II




                     appropriate   to assert lhat DOE’s programs appear to be the most cost-effective option
                     in dressing    envirnnmcntal costs associated with an increase in the demand for
                     e!ectricity services.

                     Based on GAO’s audit of the programs of the Office of Energy Efficiency and
                     Renewable Programs, xhe attached table a&led Wigbest Retums on Govemment
                     Investmenu” shows how cost-effective EERE’s pqrams are, The cost savings to
                     consumers from only two JZERE progams more than doubles the entire research and
                     development budget of EERE over the years 1978 to 1996.

See comment 2.   l
                     The report seems to imply that ifrestrucmring lowers elecuicity prices there will be no
                     need fir the Department’s energy c%ciency progranx This reasoning is fglkious fbr
                     rho following ISuorls:
                     1
                            l3ecase ekrric industry restructuring is till in irk formative stages, it is
                            pmmritum to speculate on wb.at the uttimate effect of r-ngwill            be or
                            exactly how the Department’s programs will need to adapt Even if the price of
                            electricity is reduce on average,there may be large segments of the market (e.g.
                            some residential and small commercial entetprises) for which the price till
                            increase.

                     *      After restructuring, rhe problem of sub-optimal private research and dcveiopmcct
                            will remain because industry support of techaolqyy devclopmmt will still be
                            hindered by 8 focus on short-term profitability. a lack ofresou~     the inability of
                            individual firms to capture the full benefits of specific teehmibgy improvements.
                            and the general under investment in research that be&% the common good
                            more than the cmporatc bottom line

                     *      Undu any sceuario, cotxgy efkiency investments will be needed to improve our
                            Nation’s meqgy productivitqr, prevent polhzicm, keep America secure, and engage
                            the international market Indeed, the Department’s ef?kicncy prom      will
                            besome increasingly important as the intfzmational community moves 10 meet the
                            chalIcoge of ch-nate change.

                 .   The report &ils to put into context the role of mark& barriers in DOE’s policy rationale
Now on p. 18.        for enqy efliciency programs. For cxamplq on page 17. the repti states:

                            ofsehdary     imporwcc   for ratio&e, DOE cites market barriers that inhibir
                            cost-ef%eclivc inwstmmts in cfkient reAnologics and practices. such as:

                     To chri@ DOEs rationale, that sentence should be repbtced with the follakng:
See comment 3.
                            Because cneq-cfficient kchnologk and practices can mitigate the
                            environmental external costs of electricity generaCon and transmission (a mar&n

                                                              3




29                                                          GAOLRCED-97-107R          Electricity    Conservation
ENCLOSURE II                                                                                       ENCLOSURE II




                             failure), DOE seeks to elintinae market barriers that inhibit co?-e&&e
                             hvestmerrts in &icient technologies and pfactiees, such as:

Now on p- 23.        Also, on page 22, to clarify WE’s rationale, the first sentence and the first bullet shod
See comment 3.       be dclesed and replaced with ~olloting:

                             Because of thefailae    of the ntDrkd to adequately consider ekc&icity-related
                             e.xtcrnef environmcntai costs, DOE is working to remOve market bat-r&~ for
                             tcchnobgies that arct no1 itam6.d to the emironme~~

                             t       BeCausethis tttmh?foilve     is not sdliciently addrssed, the reduction of
                                     min-ket bainh in energyhkimt         technologies may lead to a more
                                     economicaIly efficient resource aUocation

Now on p. 25.    .   On page 24, the report states the following:
See comment 4.
                             Even though on average electricity prices mq fan, -ring          may result in
                             higher prices during pe& demand periods. During these pcrioda, consumers
                             would likdy WC less electricity and adopt more energy-efficient tochnol@es.
                             Thw restructuring may fxihate       iheadoprion     of enncrgy-effidest     tesbnologies
                             by some households and buW.

                     Atthou@ electricity reamxhuing may indeed facilhte the adoption of energy-efficient
                     technologies by some households and busksq           the rcysotig   stated above is flawed
                     It is impom    to make the distinction bet&~      taad-sliifsirrg and faackesbrtin
                     Higher pikes duhug peak demand peti& may .iM rhe dgmand fM eiecvicity To rimes
                     when the price is lower (id-.&$iq).        For -*          a consunxx EwklirIstauatimcr
                     on their dishwashex to run it in the middle oftie Right witen demand and prices are low.
                      Howcucr, if on average electricity prices remain the same or lower than before the
                     intr~ction   of time4day     rates, there would be no additiooaI incentivefor consumers
                     to install techuolo~es   whidt are more energy-efficient.    In 0th    words. peak prkg
                     would offer no additional ineentivc for the consumer to educe the total amount of
                     electricity consllmed each day (i.e., Irwd reLiroction).
Now on p. 26.    .   On page 25, the following statement is made about a reszructured         electricity industry:
See comment 5.
                             Privatti sector alone may undampply      investments in certain types of R&D such
                             as electricity tiestructure. It i.5unclczr whaL other m          of R&D investment
                             t-my bc undzrsupplicd by the private scctor~

                     These statements unfairly imply that whereas public funding of eieckcity hfkstructurc
                     R&D may be appropriate, finding of other types such as energy ei?iciency R&D may not
                     be. ~Sowever,there is reason to believe that R&D on both energy ef&iency and
                     e&ticizy i&astrucxu:e ;vill be undersup&zl. It is commonIy recognized that induwry

                                                                4




30                                                            GAO/RCED-97-107R             Electricity       Conservation
ENCLOSURE II                                                                                               ENCLOSURE II
See comment 7.




                                 s~ppxt of technology development is ofien hindered by a focus on short-term
                                pr&akility,   a lack of resources, the inability ofindividual firms to capture the &II
                                ben&s of‘specific technology improvements, or the general under investment in
                                research that benefits the common good more than the corporate bottom line

Now on p. 22.               I   The bullets on pse 2 1 appesr to be a paraphrase of tie Department’s dratt policy
See comment 6.                  statement in a memo to the General Accounting Of&e dated January 29: 1997 (pages 5
                                and 6). tioweser, iz tie translatitm, important meaning was lost. The simplest way of
                                making the bukts accurate would SC to ddere the phrase “in near term” in the first
                                bullet ml ddetc the phrase “in longtcnn” in the second bullet.

                            .   The pie charts on pages 7 and 8 appear to be inaccurate - the data should be
Now   on pp. 8 and 9.           reexamined and the charts sho11Hdearly poinl out the assumptions &id& were made in
See comment 7.                  their develapment:

                                *          The percent share attributable to renew&s appears to bc inaccurate with
                                           Mated numbers in 1974 and underestimates in 1995 and 2015.
                                *           It appears chat the pie-charts do not include data from independent pow=
                                           producers   @pi%).

                        For imfibrmation otl bistotical dectricity data contact Howard Walton from the Energy
                        JnSorrnatbn Administraticm at 202/426- 1223. For infbrmation on f”“ts            of electricity,
                        contact Mary Hutder from EIA at 202/5&S-2222.

See comment 8.          l       As indicated in the Febq       18, I997 memoto the GAO, the exampks of programs
Now on pp. 20                   listed in the tables on pages 19 Itnd 20 do not provide a representative sample of the
and 21.                         programs of the 0%~ of Energy Deficiency and Renewable Technologies. The
                                t;ebruaty memo pmvides a more appropskte sanrple..

See comment-9.          .       As noted in previous comments, we would prefer that the term “conxxvation” be
Now on p. 14.                   r@aced  with the lerm efickncy (p&c 13, sexnd b&t).

                        *       On page IS, fourth bullet, it would be more accurate to replace the word “and” with the
Now on p. 16.
                                vrd       %hich.”
See comment 10.




                                                                            5




31                                                                       GAOLRCED-97-107R         Electricity     Conservation
ENCLOSURE II                                                                     ENCLOSURE II
The following are GAO’s responses to comments made by the Department of Energy in its
memorandum dated March 26, 1997.

GAO’S COMMENTS

1. Whether or not a particular program will be cost-effective in addressing the
environmental degradation that may result from electric utility restructuring depends to a
great extent on how restructuring unfolds and on the path of future electricity prices. As
a result, it is uncertain whether DOE’s current programs will reduce additional
environmental damages in the most cost-effective way. Other alternative programs could
achieve the same or greater reductions in environmental degradation for less cost. The
term cost-effective has a specific economic meaning. For example, a cost-effective
program is one that achieves a specific reduction in emissions of pollutants at the lowest
possible cost, among possible alternative programs. On the other hand, a program for
which the estimated benefits exceed the estimated costs may not be cost-effective if an
alternative program achieves the same or a greater reduction in emissions for less cost.

Regarding DOE’s comment that our audits and analysis have shown that DOE’s Office of
Energy Efficiency and Renewable Energy’s policies and programs are among the most
cost-effective ways to address environmental concerns, GAO has never reported that
DOE’s policies and programs are among the most cost-effective ways to address
environmental concerns.

Our statement that DOE cites market barriers as of secondary importance for its policy
rationale reflects language suggested by DOE officials during their review of our draft
report on February 26, 1997. We welcome DOE’s clarification that DOE is seeking to
remove market barriers as a means to address the market failure aspect of environmental
degradation rather than using the existence of these market barriers as a specific
rationale for the policy and programs. It remains uncertain, however, whether eliminating
these market barriers is the most cost-effective means for reducing environmental
degradation.,

2. We agree with DOE’s comments that electric industry restructuring is still in its
formative stages. As a result, it is uncertain whether restructuring will result in greater
environmental degradation than otherwise would be the case, and if so, whether DOE’s
current programs are the most cost-effective means for addressing additional
environmental damages. In addition, our report states that in a restructured and more
competitive energy market, the private sector alone may undersupply investments in
certain types of research and development such as the electricity infrastructure.

We also agree that in the long term retail electricity prices will be important in
determining whether consumers will invest in energy efficiency. If electricity prices rise,

 32                                                     GAOLRCED-97-107R   Electricity   Conservation
ENCLOSURE LI                                                                       ENCLOSURE II
we would expect some consumers and businesses to undertake more energy-efficiency
investments than they would have otherwise. As a result, there should be less need for a
federal role in encouragmg the adoption of energy efficiency technologies. If on the other
hand electricity prices fall, lower prices may induce an increase in the emissions of
certain pollutants through an increase in the consumption and generation of electricity.
In this case, a federal role may be needed to help reduce environmental degradation.
Finally, the issue of climate change is currently being studied and the best approach for
resolving this issue has not yet been determined.

3. We have revised our report to clarify that DOE has identified market barriers that,
according to DOE, inhibit cost-effective investments in energy efficiency technologies.

4. We agree that electricity restructuring may facilitate the adoption of energy-efficiency
technologies by some households and businesses. We also agree that higher prices during
peak periods (for example, during 4 p.m to 7 p.m.) will induce some consumers to shift
their demand to off-peak periods (for example, after 7 p.m.). Some consumers and
businesses, however, may not have the flexibility to shift their demand to off-peak hours.
For example, restaurants provide services during peak hours and thus may not have the
flexibility to shift their electricity demand. Indeed, in response to higher electricity prices
during peak hours, restaurants may choose to adopt more energy-saving equipment as a
way to reduce energy costs.

5. From an economic perspective, a federal role in supporting research and development
may be justified in cases where private Erms are unable to capture all of the benefits of
their research investn-tents. Zn such cases, the research may provide important spillovers
in the form of benefits captured by other firms for which the Grm making the investment
does not receive compensation. This type of research may benefit society by leading to
greater innovation and higher economic growth than would otherwise be the case.
Conversely, a federal role may not be economically justified if the research primarily
benefits the firm conducting the research, or for which the benefits to society are limited.

6. We deleted the words “In the near term” and “In the long term” from the report.

7. The data are from EIA’s Annual Energy Review 1995 and Annual Energy Outlook
1997, With Projections to 2015.’ As stated in our report, the data are for electric
utilities, and as a result, do not include data for nonutility generators like independent
power producers. ELI’s Annual Energy Review does not include a comparable historic


‘Annual Energy Review 1995, Energy Information Administration (DOEYEXA-0384(95),
July 1996) and Annual Energy Outlook 1997 With Projections to 2015, Energy
Information Administration (DOE/EL&0383(97), Dec. 1996).

33                                                       GAO/WED-97-107R   Electricity   Conservation
ENCLOSURE II                                                                 ENCLOSURE II
data series for non-utility generators. The Annual Energy Outlook forecast indicates that
for electric utilities and non-utility generators combined, the proportion of generation
attributable to each fuel source in 2015 would be 49.6 percent for coal, 28.6 percent for
natural gas, 1.5 percent for petroleum, 10.8 percent for nuclear, and 9.5 percent for
renewable.

8. As indicated in our report, the list of programs represents selected examples of
current DOE programs, which are related to electricity production, use, and conservation,
and is not meant to be comprehensive. In addition, the programs listed in our report are
a subset of those identified by DOE in its memo dated February 18, 1997 as an
appropriate sample.

9. We have revised the report to clarify that neither the Administration nor DOE has an
explicit electricity conservation policy.

10. We have replaced the word “and” with “which.”




 (141004)

 34                                                   GAO/XCED-97-107R Elecixicitg   Conservation
Ordering      Information

The fist copy of each GAO report and testimony is free.
Additional   copies are $2 each. Orders should be sent to the
foIlowing address, accompanied by a check or money order
made out to the Superintendent     of Documents, when
necessary. VISA and Mastercard      credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted    25 percent.

Orders      by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner      of 4th and G Sts. NW)
U.S. General Accounting       Office
Washington,  DC

Orders may also be placed by caIl.ing (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301)       413-0006.

Each day, GAO issues a Iist of newly available reports and
testimony.   To receive facsimile copies of the daiIy list or any
list from the past 30 days, please caII (202) 512-6000 using a
touchtone phone. A recorded menu wilI provide information         on
how to obtain these lists,

For information on how to access GAO reports on the INTJZRNET,
send an e-mail message with ‘7nfo” in the body to:

info@www.gao.gov
United States
General Accounting Office
Washington, D.C. 20548-0001


Official Business
Penalty for Private    Use $300

Address   Correction   Requested